by Jason Bodner

January 24, 2023

Cats are agile. Oil tankers are not. The United States, the largest economy in the world, is less like a cat and more like an oil-tanker. It takes a while for action to yield a result. In the case of a fully loaded oil tanker, it takes about 20 minutes to turn around, in which time the boat drifts forward about five miles.

Markets sagged Wednesday and Thursday due to hawkish comments by Fed officials and Producer Price Index (PPI) data that was too weak. James Bullard, one of the most aggressively hawkish Fed officials, thinks we should just rip the band-aid off and get to over 5% rates as quickly as possible.

The truth is that the Fed is data dependent. The latest CPI and PPI data show inflation and the economy are both slowing. The next CPI data to come out in mid-February will likely show more price mediation. I suspect that shelter costs will be lower. Shelter has been persistently impervious to tighter policy. But I’ve pointed out in the past that shelter is calculated on a flawed method called Owners’ Equivalent Rent.

Oversimplifying, homeowners are randomly surveyed, asking what they think they could rent their homes for. Their answers – which are likely inflated by starry-eyed emotion (greed) – become the “shelter cost.”

As far as interest rate policy goes, the Fed also can’t be perceived to be too far out of line with what is happening in the market. The yield on the 10-Year Treasury has fallen about 20% from a peak of 4.234% in October to 3.397%, its lowest level since September. That’s a big move!  Meanwhile, the effective Fed funds rate has risen more than 10-fold since last April and now sits at 4.1%. This type of disparity can’t last for long as the Fed doesn’t want to fight market rates. This is why I think Mr. Bullard may be in the Fed’s minority when it comes to rate hikes. I suspect the next FOMC meeting to raise 0.25% and hold.

The fear drum of recession and job loss is still loud and clear. Tech job loss is the stunner story of the year so far. Earlier in the month, announced 10,000 job cuts. Microsoft and Google are the latest to announce tech job cuts. Amazon announced 18,000 cuts. But I pointed out that while serious, the company hired 800,000 in 2021 and 2022 and still employs 1.62 million people. Their cuts amount to just over 1% of their workforce. The eventual effect of these painful events of people losing their jobs should be higher profit margins. And should the economy have a soft landing or even a mild recession, there will be a reversion to tech success. We are increasingly reliant on hardware and software in every aspect of our lives. This has been true since the Industrial Revolution and won’t stop because of a little inflation. Value hunters are already stepping in to buy beaten down tech shares, which I’ll discuss below.

Before I do, what I find interesting is that headlines have started to shift slightly. Recently in the financial media, we are seeing headlines talking of investors positioning for a recovery, touting equity inflows for the first time in 10 weeks, and investors betting on a China recovery. The flames of bullish emotion are starting to be stoked. This is inherently good, folks, as we are well into more than a year of negativity.

All that qualitative evidence for bullishness is echoed in the quantitative data I follow. While last week’s market sloppiness might cause CNBC to raise concerns that we are headed back lower, the data doesn’t support that narrative. First, I look at the Big Money Index (BMI), which measures unusual institutional money flows over a 25-day moving average. It’s been on the rise for most of January, but started pulling back on the 19th, measuring the prior day’s action. The main question that arises: Will it continue lower?

Big Money Index Chart

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

If we look at the unusual buying of stocks and ETFs, we see there’s not much cause for concern yet. For the past month, we see dominant buying and average selling. The multi-decade average is about 65 buys and 35 sells per day for stocks (left). When it comes to ETFs (right), we don’t see much selling at all:

Big Money Buys-Sells ETF

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

Money has been flowing into stocks, but where is it going? Below we can see the appetite for small and mid-cap stocks. Buying has been dominant in companies sized $50 billion and below for yet another week:

Big Buying-Selling Market Cap Chart

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

It is also encouraging to see what is getting bought. Last week, we saw inflows into technology, discretionary, healthcare, and financials. I like this action because these are strong growth sectors. If the buying were defensive, we would see staples and dividend-saturated sectors. We are not seeing that now:

PIE Chart

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

Lastly, a quick check in every sector shows a uniform story: Buying. All sectors have seen visible inflows since the beginning of the year. And this is a continuation of the trend since October (which I predicted).

Discretionary vs XLY Staples XLP

Energy Buys vs XLE FIN vs XLF

Health Care vs XLV Industrials vs XLU

Tech vs XLK Materials vs XLB

Real Estate vs XLRE Comm vs XLC

Utilities vs XLU

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

Strong buying and weak selling tell me that my bullish view is the right one. Studies show that since 1980 mid-term election years see a rise from November to the next April 100% of the time, with an average gain of 12.6% for the S&P 500, so there is likely some light at the end of the tunnel, and it’s not an oncoming train, like the media would have you believe. For now, there is opportunity. Investors are finding it in small- and mid-caps. The fed will speak again soon, and hopefully bring clarity. My hunch is that data is weakening enough to adopt a more observational stance, so hikes will hold for a while after the next one.

Either way, the tanker is slowing. No one knows what the future holds, but as George Bernard Shaw said, “Better keep yourself clean and bright; you are the window through which you must see the world.”

Navellier & Associates owns Microsoft Corp. (MSFT), and Amazon.Com Inc. (AMZN), in a few managed accounts. We do not own Salesforce, or Alphabet (GOOG).  Jason Bodner owns Alphabet (GOOG). in a personal account. He does not personally own Salesforce, Microsoft Corp. (MSFT), Amazon.Com Inc. (AMZN).

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

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
China’s Global Leadership is Slowly Slipping

Income Mail by Bryan Perry
U.S. Stock Market Enters a Fog of Uncertainty

Growth Mail by Gary Alexander
Davos Dreamers vs. Mont Pelerin’s Principles

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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