by Jason Bodner
January 23, 2024
Feeling blue?
That expression came from sailing. When a ship lost their captain at sea, they would fly a blue flag.
Feeling that way about your investments is understandable, with negative news constantly swirling around. War, politics, inflation, and a holiday hangover can put anyone into a funk. Feeling blue makes sense, but I’ll give some reasons not to feel blue, and also reasons to keep your eyes on the horizon.
Markets grind on. Despite a stumbling start to the year, stocks quickly navigated the storm and righted the ship. The QQQ (the NASDAQ 100 tracking ETF) hit an all-time high the other day. Tech is back on top as the reigning sector, and all seems calm at sea. While we enjoy our smooth sailing, today we will go into what to expect in the coming weeks and what to look for as potential signs of clouds on the horizon.
The first thing to watch for from the crow’s nest is the Big Money Index (BMI). For those unaware of this tool, it is a powerful indicator of unusual money flows. When it (the amber line in the chart below) is rising, it indicates money flowing in. When it falls, big money is flowing out. What we see in the chart below is that money gushed into stocks starting in early November and it hasn’t really stopped:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The important lines are the red and green dotted lines. When the BMI rises above red, it indicates that 80% or more of all unusual trading activity in the prior 25 days was on the buy side. The red line indicates that such a level of buying is unsustainable: The market is overbought. Now if you’ve been following me, you’ll know that this by itself is not a signal to reduce risk and raise cash. As I have highlighted before, the BMI can stay overbought for quite a while. In fact, during COVID, the BMI remained overbought for 84 days, from May 6 to September 2, 2020. Here are some useful statistics about an overbought BMI:
• It happened 72 times since 1990.
• It lasts an average of 22 trading days or about one calendar month.
• It takes an average of 16 calendar days to peak.
• On average, returns are positive 1, 3, 6, 9 and 12 months after the first day of overbought.
Perhaps more importantly, we need to watch for when the BMI falls out of overbought. That’s the time when we can expect softer market performance. Looking at the chart below, we can see that the post-overbought BMI predicts weaker returns (dark blue) versus that of average S&P 500 returns (light blue):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Sail on – as we have not broken below overbought just yet.
Things actually look quite healthy in terms of unusual buying and selling. In the following chart, we see that stocks and ETFs are seeing consistent buying that are nowhere near extreme levels:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This tells us that, despite an overbought market, the winds haven’t shifted direction yet. Buying is still happening at a nice healthy constructive clip. It is also interesting to see where the buying is happening in terms of sectors. I mentioned before that NASDAQ made a new high. And we can see the echoes of that in which sectors are rising to the top of our strength rankings. Tech stocks have once again taken the lead. Some other sectors at the top of the list are growth-oriented too, as we see Industrials, Financials, and Discretionary stocks in the top five. Financials are poised to do well in a high interest rate environment. It’s unsurprising that Discretionary stocks slip a bit after the holiday binge buying is behind us.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When we delve into the distribution of buying and selling last week, we again see tech racking up 40% of all buys. We saw buying in hardware stocks, networking companies, semi manufacturers, chip-makers, and software. And while Discretionary stocks ranked 5th in sector ranks, they ranked second in unusual buying. We saw home-builders, hotels and leisure, retailers, and restaurants getting accumulated.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
My first thought after seeing this data is that these are the profiles of stocks that don’t get bought up before a meltdown. In other words, investors are buying growth, not shying away from it. Selling was not substantial, but nearly half of whatever selling there was resided in energy stocks. This makes sense as the price of oil retreated from a high of nearly $94 per barrel down to $74.50 – a -20% drop.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Clearly, lower oil prices impact margins on oil producers. I should add that if there is any progress on peace talks in the Middle East or on the Russia-Ukraine front, it would further ease oil prices which would likely increase selling of oil stocks. As of now – no one has any clarity on that front though.
Sometimes we know something is going to happen, like now. We know the BMI will eventually fall from overbought. We don’t know precisely when, but we have a good idea based on history. The averages tell us that the BMI should fall from overbought 22 days after going overbought. That works out to January 19th – clearly not happening given the current environment. We know it will fall, but this could go on for a while. The best course of action is to stay on the current course and react as new data comes in.
Growth is in favor, and despite the market invariably falling from overbought in the future, there are more reasons why 2024 should be strong:
• There is more than $6.14 trillion sitting in cash – the highest on record.
• Inflation is falling with CPI at 3.4%. It continues to fall even faster on a 6-month basis.
• The target rate of 5.25-5.50% is 60% higher than inflation by the highest measure. That’s a lot!
• The recession hard-landing never came.
Smooth seas are here, for now, but they never last.
Or, as Franklin D, Roosevelt so aptly said: “A smooth sea never made a skilled sailor.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
European Leaders Are Anxious About a Possible Trump Win
Income Mail by Bryan Perry
It Seems Like Living With 3%-4% Inflation Is OK With Mr. Market
Growth Mail by Gary Alexander
The Monthly Jobs Data is Bogus and Premature…
Global Mail by Ivan Martchev
Fresh All-Time Highs Across the Board
Sector Spotlight by Jason Bodner
My Cure for Any Market Blues
View Full Archive
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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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Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.
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