What really causes a market to crumble?
The first answer that comes to our minds is obvious: selling!
But if we look from another perspective, the answer is even simpler.
What causes a market to turn from bullish to bearish is actually the absence of buying.
I’m going to walk you through exactly what I mean today.
And there is one other concept that readers should grasp.
When a bull market comes after a bearish landscape, it’s the lack of selling that causes a market to start bubbling…
No More Buying
The COVID-19 pandemic is a great illustration of these concepts.
By now, we all know the pandemic and the related lockdowns caused stocks to sink incredibly fast.
We can see it. The market was chugging along… and then came the snake in the grass: COVID.
It’s plain to see that huge red selling drove the market into the ground… and then big blue buying lifted us right back up.
But if we zoom in, we see it’s not entirely that clear cut.
In late February, the SPDR S&P 500 ETF Trust (SPY) was still rising. But buying was waning… then suddenly stopped. And it didn’t reappear until April.
As buying shrank, the BMI started to fall from overbought.
But the SPY kept rising even when buying was disappearing.
And so when selling finally hit, there was no buying to absorb it.
This is a key point because there is always selling in the stock market.
If there is more buying pressure than selling, buyers just absorb the sellers and continue to push the market higher.
And vice-versa, when sellers vanished, there was no one left to keep the buyers down. That’s what happened after the BMI went oversold in April 2020 after the crash.
But the buying couldn’t begin again until selling left town.
With all that in mind, let’s fast-forward to what the markets are showing us now…
Waiting for the Pivot Point
After the heavy selling in the first half of the year, selling finally started to dwindle and get out of the way at the end of June.
But buying didn’t really pick up until mid-July.
It’s that pivot that I am talking about.
More buying is almost less important than a lack of sellers. With selling dropping off, the sudden intense buying had plenty of room to drive stocks higher.
We saw the same with ETFs.
And the Big Money Index helped light the way. It went oversold on July 14, and markets have rocketed higher ever since.
Since that day, the Invesco QQQ Trust Series 1 (QQQ) rallied 15.7%, while the SPY rallied 13%.
It’s important to restate: the bear market truly began when buyers stopped buying.
At the end of 2021, the Fed talked tough and splashed water on the fire. Assets like tech stocks and cryptos started to fall.
As 2022 rolled into spring, all stocks felt the burn. The signal to buyers to stop buying meant sellers could step in with nothing to get in their way.
But on July 15, selling just dried up. Then the buying flooded in.
And unlike the better part of the last two years, it hasn’t been a big rotation of capital from one sector to another…
Since mid-July, there has been buying in discretionary, staples, utilities, real estate, industrials, tech, financials, and health care. Energy buying stopped in June but recently reappeared.
And health care has been the leader since mid-July. In fact, 26.5% of all unusually large buying has been in health care stocks. Tech, surprisingly, has been close on its heels.
Money Is Flowing In
What’s clear now is that money is flowing into stocks.
But the hidden message is that sellers have virtually vanished. With more and more clarity coming from the Fed, the horizon seems clearer.
And with the Consumer Price Index (CPI) report coming in less than expected, the message is clear that inflation has likely peaked.
As inflation cools and rates stabilize, the market is cheering and starting to snap into focus. I think this sets up for a stabilizing third quarter for stocks and a rally into the end of the year.
So, if you’re bearish, that’s fine.
But you may want to take a fresh look at the data. It may not be as bad as you think.
Talk soon,
Jason Bodner
Editor, Outlier Insights