by Jason Bodner

January 25, 2022

Silly things can turn sour very fast – like in 1355, when two Oxford University students and a tavern owner fought about the quality of their wine. The result was a three-day-long riot, killing up to 93 people.

Naturally, Oxford survived. Students still drink, but everything came unhinged in those three days; it must have felt like an eternity. Once the dust settled, I bet many wondered: What on earth just happened?

It’s like the stock market performance recently: Everything seems like it’s coming unglued. Is it? Let’s dive into what happened in the last three weeks and then see what it might mean for the near future.

The “January Effect” is a theory that stocks tend to rise in January (for the last 70 years), but not lately.

Market Indices Table

It turns out the January effect hasn’t held up well recently. According to my colleague, Gary Alexander,

It appears that January has been NEGATIVE in the S&P 500 in 11 of the last 20 years. That surprised me, but the historical data shows that the January Indicator has also failed, so we shouldn’t be worried if January closes down this year. It closed down the last two years too, and the market was up both years.”

Whether the year closes up or down, things look ugly right now. January is an intensified continuation of what began in mid-November, when selling was focused in Tech and Healthcare, which quickly spread to most growth stocks. Now it is spreading to the rest of the market.

Let’s look under the hood of the major indexes to see where the pain has been concentrated:

Market Indexes Under the Hood Tables

The pressure points (the double-digit January declines) are clear: Growth stocks and small caps are feeling the burn. Discretionary, tech, communications, and real estate are the weakest sectors. Value has held up relatively well, and energy is clearly bucking the trend as the only bright spot, up 12.8% YTD.

I also like to compare this sell-off to prior big selling periods. By looking at what I call big money trading (unusually large trades), we get a framework. MAPsignals identifies unusually large stock buying and selling. Below, we can see blue bars representing the number of stocks bought in an unusual way on a given day, while red bars represent selling. First, we see selling increasing since November, but there has also been decent buying to prop up the market. Then, suddenly, the buying vanished last week.

What also leaps off the page, is that this is the most selling since the pandemic arrived in early 2020:

Big Money Stock Buys and Sells Chart

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

We see the same pattern in ETFs:

Big Money ETF Buys and Sells Chart

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

We see echoes of the index tables above when we look at big money flows: Half of all buying since January 1st has been in Energy and Financials, while 50% of selling has been in tech and healthcare:

Big Money Flows Pie Charts

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

But now, big investors are just selling everything. Stocks, crypto, you name it.

Folks, the news driving this selling is not even close to the fear-factor of the Pandemic months, so what’s causing the stock selling now? I think this is an immense overreaction, which I call Taper Tantrum 2.0.

Some Elements Supporting Taper Tantrum 2.0 (and the Coming Rebound)

Here is my theory:

  • Supplies everywhere are tightened because of COVID-19, causing prices to go up.
  • Because COVID-19 forced us all to stay home, to avert a complete financial meltdown, the Fed rescued us all by flooding the economy with money (liquidity). They did this by dropping rates to near zero, buying bonds, and giving stimulus, aid, and loans.
  • With more money chasing fewer goods (due to low supply), prices go up even faster. We all feel inflation – at the pump, at the grocery register, at restaurants.
  • Since it’s hard to find workers nowadays, that pushes prices even higher. Inflation is everywhere.

But now, the quantitative easing wind-down is here. And that’s freaking out a lot of investors.  That’s hurting growth stocks in particular: Because investors worry that higher interest rates will stifle growth, since growth companies will need to refinance their debt at a higher cost, they are selling growth stocks.

With higher rates looming, investors are snatching up financial stocks that will benefit from lending. But they are also punishing growth stocks. Some are down 60% from their highs in a few short weeks.

The Fed must engineer a soft-landing from QE. Many fear that may not be possible. Jamie Dimon, JP MorganChase CEO, says we’ll get a soft landing if we’re lucky. Goldman Sachs forecasts four rate hikes.

That’s why I believe this price dip is almost “engineered.”

Think about it: The Fed must fight inflation because assets are too expensive. Forcing stock prices lower is a way to lower asset prices, so the Fed uses scary language. The bid for stocks stops because no one knows what will happen. This opens the door for High Frequency Traders to sell into weak bids.

Stocks are sinking in January, but now earnings will come out and that should help stabilize the market.

Going forward, I think Omicron will fade away and people will have to go back to work. Supply chains will eventually ease, which means that prices will fall with more supply. The Fed will then raise three times instead of the four increases, which this sell-off has already priced in.

Voila! That’s the positive “surprise” which provides the “soft landing” that everyone says will be so hard.

Am I right? Only time will tell. But one final table might tell us what’s to come. We went back and looked at similar weeks of epic selling going back to October of 2014. See for yourself, but the short of it says stocks have historically gone up the next week, two weeks, then one, three, and 12 months:

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

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Bitcoin’s Major Topping Pattern is Now Complete

Sector Spotlight by Jason Bodner
Welcome to “Taper Tantrum 2.0”

View Full Archive
Read Past Issues Here

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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