January 22, 2020

I remember how much I loved the original movie, “Willy Wonka and the Chocolate Factory,” starring Gene Wilder. Seeing it as a child, it simultaneously fueled my imagination and freaked me out.

The movie was ahead of its time in so many ways. For instance, Wonka’s boat, the SS Wonkatania, has just enough seats on it – and not a single to spare – but Augustus Gloop was sucked up into the chocolate pipe before the ride, so Wonka was either a bad counter or he knew that one of the kids would meet a nasty fate before the boat sailed. Another memorable scene (you may remember) is the super fizzy lifting drink scene where Charlie and his grandpa stole a sample. They floated up and up until they almost got shredded to bits by the ceiling fan. They had to burp to get back down to ground level.

That’s like this bull market – a market that simultaneously fuels the imagination and freaks people out!

Willy Wonka Image

We are seeing off-the-charts buying persisting right through the middle of January. Last week saw an astonishing nearly 700 buy signals against only 58 sells. Ten of the 11 S&P sectors (all but energy) saw more than 25% of their institutionally tradable stocks log buys. Buying is not just persistent; it’s massive.

Map Signals Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As the sectors go, they are all cooking with gas, with virtually no selling in sight. And as the market goes up day after day, you may wonder “when is a good time to get in and where do I put my money?”

The first question is easily answered by looking at the Big Money Index (BMI). It is now at 87.6%, which is wildly overbought. This means the level of buying now is unsustainable. It may be hard to fight the feeling of wanting to get in if you’re on the sidelines, but you’d be buying at an unsustainable top.

The reality is that this is not Main Street buying. It’s not you and me. I haven’t heard people at the gas station raving about stocks. The office watercooler doesn’t have people clamoring to compare their Schwab statements. This buying fever is more like Bitcoin and Cryptocurrency fever-fueled speculation. When the Coinbase comparisons peaked, so did the crypto market. We’re nowhere close to that.

That’s the good news. This bull market has loads of room yet to run. But timing-wise, this market is overheated and due for a pullback. When the BMI starts to fall, that’s the signal that a top has likely been hit and a pullback is imminent. I can’t, in good conscience, recommend buying into a setup like that.

Map Signals Overbought Indicator

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Looking for Life’s Outliers

As for where to put your money, I’ll answer that with a story about football. Last week, I went to New Orleans to watch the LSU/Clemson National Championship game in the Superdome. It was awesome. I don’t even particularly love football. I’m more of a hockey guy myself, but what I do love is an outlier.

Luke and me at the LSU/Clemson Football Game Image

An outlier is someone or something that clearly deviates from the pack. Babe Ruth was a baseball outlier: he skewed home run statistics for the last 100 years. Michael Jordan was a basketball outlier, establishing long-held records that only LeBron James may come close to breaking. Wayne Gretzky was the hockey outlier. There was Gretzky, then everyone else. You can easily grasp an outlier in this Gretzky graph:

Outlier Gretzky's Stats Graph

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

For me, the LSU/Clemson game was less about the championship and more about seeing Joe Burrow, the college football outlier. He threw for more touchdowns this season (60) than the prior four LSU seasons combined. He led the NCAA with 5,671 yards passing this year. He has become a legend in college football. I couldn’t pass up the chance to see an outlier. If you want to know what an outlier looks like after he caps off an ultimate achievement, I took this picture of the screen after the game:

Quarterback Joe Burrow Image

Outliers are where to put your money. In a sea of 5,550 stocks, I focus on the Joe Burrows of the world: only the best. That means I am super-picky. It means I don’t care about 99% of stocks. Let Cramer and the other pundits battle about which ones could be turnaround stories or could get a new lease on life. I only want to find outliers. There is heavy evidence that those outliers – about 4% of all stocks – are responsible for all the gains in the market for the last 100 years (see “Do Stocks Outperform Treasury Bills?” in Journal of Financial Economics, 2017, revised June 3, 2018, by Hendrik Bessembinder).

Source: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

While we stay patient for a Charlie-like burp buying opportunity, make your outlier shopping lists. Look for stocks with growing sales and earnings, great profit margins, low debt, and unique businesses. Look for those types of stocks that big money investors are loading up on.

Once you win, you can get that face. Gene Wilder had it. Joe Burrow (called Joey Burreaux in Cajun-land) had it. MJ, the Babe, the Great One, they all had it. They knew they were outliers. When you look for when and where to invest, play the odds, and bet on the outliers. They are the ones that keep winning, that keep shattering records. But then again, I’m not telling you anything new… You already know it.

Get in the winning habit. According to Vince Lombardi: “Winning is habit. Unfortunately, so is losing.”

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner

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