by Jason Bodner

January 28, 2020

In 2014, the London cabbies were upset. Uber was muscling in on their territory, so 4,000 cab drivers protested and ground parts of London to a halt. In an epic backfire, this led to an 850% increase in downloads of the Uber app in one day.

Upset London Cabbies Image

The lesson is: When things get extreme at one end, it creates a vacuum at the other. Cabbies wanted to suppress Uber, but they ended up doing the opposite. This reminds me of everyone buying stocks. No one wants them to go down, or thinks they ever will, but inevitably one-way traffic will lead to the opposite.

U.S. stocks had a down week for the first time in a while, but we needed that pullback. It’s healthy and long overdue. I’ve been talking about being overbought for weeks now.

So far, 2020 has been kind to stocks, but one major U.S. index is negative YTD, the Russell 2000. My data has more correlation with the Russell 2000 than most other indexes for two reasons:

  • The Russell 2000 rebalances, which makes the index more equally weighted compared to the S&P 500 and NASDAQ.
  • We measure big buying and selling on thousands of stocks equally, so it makes more sense that the Big Money Index (BMI) is overlaid with a bigger stock matrix, the Russell 2000.

Looking at the Russell is important for big money buying and selling. Three things I’m seeing in the data stand out now:

1. The Big Money Index dropped two days in a row last week. Friday saw 59% sell signals. We haven’t seen a single day of selling like that for over 10 weeks!

2. Tech is heavily overbought. It reminds me of when we noticed mega-buying in Health Care. Look how extreme it is:

XLK VS Tech Buying Chart

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

3. Health Care mega-buying is slowing. Weeks ago, we pointed out what looked like a crest in buying. Look where it is now – buying has dropped significantly:

XLV VS Health Care Buying Chart

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

As seen above, buying has been focused in tech vs. balanced buying in all sectors. Looking below, even with a down market in a four-day trading week, there was still substantial buying in Utilities, Tech, Financials, Real Estate, Consumer Staples, and Telecom.

Map Signals Table

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

The short trading week also brought more concentrated ETF buying. The one-year average is nine ETF buy signals a day. This past week has been 17 per day, slightly lower than the one-month average of 20 per day. Make no mistake, that’s big activity in ETF buying. This level of “risk on” through ETFs indicates a tactical shift into equities through money managers – likely “plain vanilla” managers. That means big institutions and Financial Advisors (FAs) are likely allocating capital to equity risk.

It’s interesting to note that out of the 81 big ETF signals last week, only one was an international ETF, and that was iShares MSCI Canada Index (EWC).

As I mentioned above, the BMI is still very high, but once a change of direction occurs it could be telling us to expect the much-awaited correction. Last week was the first change of direction we have seen in almost three months. It may just be the start of a broader shift.

Russell 2000 Chart

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

The above chart finally shows a crack in relentless buying. Looked at in a different way, the following chart shows Buy and Sell signals netted against each other. If there’s more buying, the bars are green while more selling means red. If you look carefully, you’ll see there have been only two red bars since October. One was December 3, when the market was not yet overbought. The other one was last Friday.

Russell 2000 versus Net Buys/Sells Chart

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

Here it is zoomed in to make it easier to see:

Russell 2000 versus Net Buys/Sells Zoomed Chart

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

This melt-up has been big, but I haven’t seen Main Street getting excited or even mentioning it. The crypto and cannabis buzz is still alive and well in retail newsletter-land, even in the wake of their crashes. This shows the focus is still on what works in the publishing world, which drives a lot of retail behavior.

What stands out is that retail investors have not even caught a whiff of the equity bug. To me, this is not 1999. My neighbors aren’t even asking me about, or even thinking about, stocks. There’s no fever yet.

As for news events affecting the market, I’m not concerned with the daily news (pronounced “noise”). In my opinion, impeachment will be another media circus to boost ad revenue through click-bait, but it won’t result in the President’s removal from office. It will likely bolster his claim to a second term. The Phase-1 trade deal is signed. Economic headwinds have died down. The bull will keep on trucking, in my opinion. Volatility will spring up, perhaps right on my timeline of the next few weeks but then I anticipate equities will continue their run. Companies are beating earnings, guiding higher, and expanding margins.

The environment remains an excellent backdrop for a sustained bull market. Once our data shifts, we will have an indication of when the sale might come. The data tends to be right. Since we talked about a huge lift-off coming in stocks in October, 401ks have ballooned. Trump took his opportunity to take credit:

Trump Takes Credit Tweet Image

The market is strong, but it should take a pause soon. I’m going to wait for new buys: I’m not getting sucked into a rally that’s not full force. You don’t want to ask yourself: “What are you doing wrong?”

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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