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The Large Cash Index: Human Nature and Yellow Lights

16, 2021

5 min read

This story originally appeared on ValueWalk

In his Notes on reading on the weekend Louis Navellier wrote to investors while commenting on the Big Money Index:

Q1 2021 Hedge Fund Letters, Conferences, and More

Yellow lights and human behavior

As strange as it may seem, I think yellow traffic lights sum up human behavior perfectly. When lights went out at intersections in 1868, yellow wasn't part of the plan. In fact, there were no yellow lights until 1920. A Detroit police officer named William Potts introduced them to warn drivers of an upcoming red light.

So the yellow warning light perfectly shows our human nature: Most people's eyes light up when calculating the risk assessment, however When it comes to driving through an amber light, people do a quick and rigorous risk assessment::

How many cars are there at the intersection?
Are they stopped?
Is it rush hour?
Do cars come off the vertical road quickly?
Are there cops?
How fast i go
If I accelerate, can I make it in time?
What time am I for my next appointment?
Are there pedestrians?

Then most of us shoot it anyway and fly by just as it turns red. The satisfaction of surviving this adventure without attachment is undeniable.

Be patient with investing or traffic

However, the risk assessment tends to be less strict among investors. Most investors let someone, their financial advisor, go for it. Hopefully they choose safe drivers, especially as they approach some "deep amber" lights that turn red.

Patience is not a given for most of us, whether it is traffic or investments. We just want to be there now – or at least as soon as possible. Patience pays off … over time, of course

Like much in life, the older I get, the more I realize that patience is usually the best way to go. That's why I dig deep into the data to give myself the clearest possible picture. This process leads me to outlier stocks, the 4% of stocks that make up 100% of market gains over bonds for the past 100 years.

Sometimes when everything is buzzing, I focus on stocks. Another time I'll focus on the bigger picture – the Big Money Index, to be precise. Right now it is rising suggesting that it is worth shooting through the amber light the market is flashing.

But really? Let's see why the Big Money Index says stocks are on the rise. . . and why this increase can continue.

30+ year Big Money Index chart

Here we find a diagram of the Big Money Index (BMI for short) over 30 years. Of course, it doesn't tell us much at first glance. And when I draw an index over it for 30 years, the timeframe is too narrow to see anything meaningful. After all, the S&P 500 rose by over 1,000% (1,048% to be more precise) during this time.

So I got into the data because that's what nerds do.

You don't have to do the math. I did it for you

From this graph, we can see that the BMI spent much of its time midway between overbought and oversold. Out of 7,876 trading days (31 ¼ years), the BMI was overbought 1,565 days – or 20% of the time. The BMI was oversold for only 292 days, or only 3.7% of the time. Those rare oversold cases are the golden tickets. Then you need to prepare to replenish outlier populations.

Back to my question: Just because the BMI is increasing, should we expect stock prices to rise? It makes sense that we, I mean, if big money goes into stocks, they should go up in equilibrium, right?

What I found was fascinating:


For 31 ¼ years (7,876 days) the BMI increased for 3,706 days. That's less than half the time, at 47%! It is noticeable, however, that the S&P 500 increased by 67% on BMI days (2,474 days).

In contrast, the BMI fell 53% over the 31-year span (4,145 days). And on days when it fell, the index fell with it for 2,401 of those days, or 58% of the time.

Fast forward to 2021. So far, the BMI has only increased 25 days out of 67, or 37%.

Finally, let's take into account that the 31.25 year average for the BMI is 63%.

So where are we?


So far this year, the BMI is below average in terms of the time it took to climb it. But it's rising now. And if it goes up, nearly 70% of the time we can expect stocks to go up too.

It's time to be bullish

Before you skeptically tell me that the indices usually go up, this is something you should check out. The S&P 500 index rose just 53.5% of the time, or 4,218 days, from a possible 7,876. These are good chances for a casino, but hardly good chances when judging how to fly through an amber light unscathed.

But a 70% chance that stocks will go up? These are great opportunities in the market. Right now, the BMI says higher highs are coming. And my approach is to find the market leaders – or outliers that do even better than the market.

Nothing is certain, but using the BMI history as a guide, it's time to be bullish. The light turns green.

People risk lives on a split-second probability check, but we can be paralyzed when it comes to money. It seems like our priorities when it comes to money would be to be patient, purposeful, and prioritize.

As Stephen Covey put it, "The key is not to prioritize what's on your schedule, but to plan your priorities."

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