I don’t need to tell you that 2020 was nuts. Everyone alive was impacted by the pandemic in some way, shape or form.
And I’m rarely surprised by anything! I had a front seat to the global financial crisis in 2008. I remember that meltdown like it was yesterday. Phone lines were cut as firms went under one after the other. Man, it was scary.
Last year marked the second financial crisis I’ve lived through—and it was markedly different than the Great Recession.
This past weekend, I spent some time studying what 2020 looked like through the lens of Big Money—and I was surprised by my findings. From a data standpoint, it was incredible…
It was a trying time for many, but a great environment for outlier stocks, thanks to the markets breaking a 25-year record…
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Crazy year from the BMI and ETFs
I’ve seen crazy markets before, but nothing quite like 2020. Violent selling was followed by epic buying all in the same year.
As you likely know by now, the way I track the market’s movements is by following the Big Money Index (BMI). As a reminder, the BMI tracks the 25-day moving average of Big Money activity. And as I discussed a few weeks ago, we’re heavily overbought.
Markets tend to enter the overbought zone at least once a year. In other words, there’s usually at least one big rally annually. But rarely do we stay there for months like we did this past year.
In fact, 2020 was overbought for nearly half the year—that’s rare.
We haven’t seen a sustained overbought period like this since 1995! Stocks were moon-bound.
Keep in mind that becoming oversold is pretty rare. You’re lucky if you get one of those annually.
So, in one year we had prolonged selling and buying. Now, what about ETFs?
Early in December, I showed you how ETFs saw record buying in November. Below shows the final month of the year. As you can see, the trend continued:
Most of the buying lines up with the back half of the year as expected. Now, take a look at the incredible selling in ETFs last year. When selling evaporated in April, markets zoomed:
The level of selling dried up substantially after the March lows. That’s when I was getting bullish and saw the market dealing aces.
Lastly, let’s look at where the Big Money went by sector. I’m sure you aren’t surprised that most of the buy signals went into technology stocks:
So, what’s ahead for 2021?
Last week, I outlined my investing game plan for 2021.
While I do expect a pullback in the coming weeks, for the year I expect higher highs.
The pandemic selloff was much like 2008: a complete washout… a reset. Once the meltdown was over, a new bull market emerged. I think that’s what’s happening with stocks… and why they bounced so ferociously after March.
This leads me to believe there won’t be a protracted oversold market for a while. Post 2008, stocks didn’t see an oversold market in all of 2009. If history is any guide, don’t expect another deep meltdown (similar to the pandemic) anytime soon.
If there’s a final takeaway for investors, it’s this: Never be surprised by what’s possible.
I’m welcoming 2021 with open arms!
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