January 23, 2019

Four weeks ago, on Christmas Eve, it seemed like the world was ending. You couldn’t open a website or read a headline without seeing the words “bear market” in big type. People were goading me back then, saying things like “Are you still bullish?” or “I am guessing you’re just as bullish as ever.”

My usual response was that while it was hard to be bullish when everyone is decidedly turning into a bear, I had to go with my data, and the data said to be bullish. The data told me that “this will pass.”

If I were a doctor making a dire diagnosis, it would not please me to be right. But I was making a prognosis for a swift recovery of the market, not a crash, so I can tell you it pleases me to be right. Since December 24th, 2018, the four major indexes have rocketed higher in massive gains in a short time:

It doesn’t really surprise me that the sectors enduring the most punishment are remarkably resilient in this new year. Energy rallied more than 18% since 12/24. Consumer Discretionary, littered with growth stocks, shot up 17.1%. In fact, 8 out of 11 sectors were up over 10% in 17 trading days. The laggards were defensive sectors. Real Estate only vaulted +9.3%, Staples +7.5%, and Utilities gained +3.1%. After writing for weeks, and inserting charts that were only red, it’s a welcome change to be seeing all-green.

So yes, I’m still bullish. That’s not to minimize the damage that was done. The sheer scale of the slide we all witnessed was colossal and fearsome. By now, I am pretty certain that ETFs caused the chaos. We at Navellier just completed a 25-page study on it, which you’ll see soon, but the 30-second version is this:

ETFs rose in popularity from one ETF in 1993 (SPY) to currently over 2,200 with $5 trillion of assets in them. Many of the passive vehicles were directed by model managers – outsourced fee-based strategy managers. They had sell-stops that were triggered by a lack of “dip-buyers” starting in the summer of ‘18. Algorithmic traders took advantage of low liquidity and shorted heavily. Sell triggers were hit, and model managers told their Financial Advisors (FAs) to sell. When you only have a few hundred liquid ETFs to trade out of the 2,200, and one stock can be present in almost 200 ETFs, it gets ugly. A watermelon is quickly shoved through a keyhole, and all stocks get abused because they must absorb the impact of sell-hedging from $10s of billions of outflows in a few days.

The fact that we are seeing a swift recovery doesn’t surprise me. Nor does the rise in growth names. We are seeing previous growth champs rise to the top of our buy list again, and just look at how the Russell 2000 is regaining ground faster than other indexes. This is an encouraging sign. A drop-off of unusual sell signals, replaced by slow and steady buy signals rotating from defense into more growth names, all with a major drop-off in volatility, is a good sign. And our MAP-IT ratio steadily climbing adds a great signal.

In the past week’s Sector Spotlights, I offered studies about what to expect after sustained periods of a depressed ratio. I also went over what to expect after oversold conditions. Both were very bullish near-term and medium-to-long term. This week, I decided to take a trip into, well, what defines a “trip”?

Out of 5,500 stocks, we find 1,400 on average can absorb institutional trading without major impact to their price. A stock that flags our scans for unusual volume and volatility indicates potential unusual institutional trading. Each day when we run our models, we get an average of roughly 500 stocks that “trip” the model for unusual trading. From those 500, we get 100 unusual buys or sells, stocks breaking out above a high or below an interim low: 61 buys and 46 sells on average each day looking like this:

Navellier & Associates does not own XOM, MSFT or MCD in managed accounts.  Jason Bodner does not own XOM, MSFT or MCD in a personal account.

What the Past is Telling us about Today, and Tomorrow

Looking at data from the past has provided us with important insights about what to expect. So far, they have been spot-on. So, I wanted to know what happens after monster trip-days. When I look at our model and see 1000+ stocks tripping the model (for unusual institutional activity) on one day – I take notice. That means over 70% of our institutionally tradeable universe is trading above average on volume and volatility. We now know that situations like that occasionally occur with big up days in the market, but they usually coincide with big down days in the market. So, what should we expect after they happen?

This week, I did a study to answer that question. I went through our data from 2011 on and pulled out days when we found 1000 or more stocks (over 70%), showing unusual activity. I then calculated forward returns 1-to-12 months out for the four major U.S. indexes. Let’s look at the data:

From 2011 until today, there were 64 instances in which 70% or more of our 1,400 institutionally tradeable stocks flagged unusual activity on the same day. The average for those 64 times was 1,133 per day, which is closer to 81% of the universe flagging unusual activity. As you can see below, the forward return profile was very positive. For example, the forward 3-month return of the S&P 500 was positive 75% of the time (48 out of 64) to the tune of +2.7% average. To the right you see that on average over all periods, the return was +4.3%, up 68.5% of the time. The Russell 2000 showed slightly stronger results.

To be fair, I wanted to present the data including 2018. The end of 2018 greatly skewed the returns downward, due to the monstrous sell-off late in the year. Even still, 7 out of 10 up isn’t bad. When we remove 2018 and survey 2011 through the end of 2017, we get a much more bullish picture: The S&P 500 was positive 100% of the time three months later for an average return of +6.5%! The average 12-month return for the S&P was +14.9% while the average 12-month return for the Russell was +16.3%:

Again, no matter which way you look, the data is bullish for this post-washout period. When things get hairy and uncertainty is as high as a giraffe’s ears, pessimism reigns supreme. That’s the time to dig into the data. The data said: “Be bullish,” even though everyone was prepping their bunkers.

The data now is even more bullish. So, if someone says to me: “I bet you’re just as bullish as ever,” I’ll say: “Yes I am,” until the data says otherwise.

About The Author

Jason Bodner

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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