by Jason Bodner

January 4, 2022

The year 2021 is officially behind us. “Thank God,” many of us might quickly add, as the year is widely perceived best forgotten. But perception changes over time. Take fossil fuels, for instance.

Nowadays, fossil fuels are demonized for scorching the earth’s environment. But originally fossil fuels were heralded as an environmental savior. Using cooked dinosaur bones meant less killing of whales, elephants, turtles, and other living creatures. Instead, we could use long-dead creatures to power our lives and make plastics to replace bone products – but that prideful use of fossil energy is long gone now.

In that vein, perhaps 2021 will one day be looked back on as a phenomenal year. Naturally we dealt with COVID-19, Delta, and Omicron, but the stock market did great through it tall, right?

Looking back in history, when you want to see if there was prosperity or pain, a picture is worth a thousand words, they say. And no other picture tells as much as a chart of the stock market.

As we’ve pointed out before, just looking at a chart of a stock market index is like using a rose-colored filter over reality. Sure, 2021 was good for stock indexes – just not all stocks.

Below we see a bunch of index returns for 2021. The S&P 500 was up almost 27%, but the Russell 2000 index gained only half that much. You really see the big divide when you look at the Russell 2000 Growth index, a small-cap stock market index made up of the smallest growth stocks – it’s up only 2.4%!

Fact SET Index Returns Table

We see big growth coming from just a few stocks. The seven largest stocks have a market cap of almost $12 trillion vs. a market cap of roughly $41 trillion for the entire S&P 500. That means seven (1.4%) of 500 stocks account for almost 30% of the cap-weighted index. Here are those seven super-sized stocks:

As we can still recall, 2021 was filled with gut-churning volatility. Wave after wave of rotations led traders from ‘reopen’ stocks to ‘stay-at-home’ stocks, only to reverse, time and time again. They sold dividend stocks, then bought them back. Value was down. then up, then down, then up. Markets were whippy with seemingly only these big seven to 10 stocks faithfully giving us some love and stability.

We can see the waves of money flows in and out in the following cool charts, all from MAPsignals.

First, look at the SPY (S&P 500 tracking ETF), which shows us the monster (+27%) year for SPY.

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

But when we superimpose the blue line of the Big Money Index (BMI), we see a choppy indication of money flows (left chart, below). And when you overlay the BMI against the IWM (Russell 2000 Index tracking ETF), you see a tighter correlation of prices to buying and money flows (right chart, below):

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

Now, when we look at individual stock buying and selling, we can see the money pulsing in and out of stocks. Again, we look at SPY on the left and IWM on the right, below. Notice many buying surges coincided with near-term market peaks, and many spikes in selling coincided with market troughs:

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

That indicates a lot of mean-reversion going on. When selling got extreme and markets fell, they snapped back. And when people got excited and bought, stocks pulled back thereafter.

This is interesting because if we compare to 2021 another strong year, we see key differences. Here are the market charts for 2017, a great year for stocks, especially growth stocks. Look what happens with the BMI. It had stronger upward trend overall, which lead to a stronger IWM performance for 2017:

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

Now we look at the individual stock buys and sells for 2017. We got a similar pattern of ebbs and flows, but visually, there was much more buying overall in 2017:

Now we look at the individual stock buys and sells for 2017. We got a similar pattern of ebbs and flows, but visually, there was much more buying overall in 2017:

So, 2021 looked great on the surface, but underneath much of the juice came from just a handful of stocks. The real engine for big bull markets was fairly subdued. (That engine is usually growth stocks. Remember, the Russell 2000 Growth Index for smaller growth stocks only posted a meager 2.4% gain.)

This brings us to 2022. Of course, new fears and stresses await us, but only if we let the press control our actions. The talk of the town is now about inflation being permanent, several rate hikes, supply chain hell forever, and countless other downers. But please remember, these stories are there to entertain us, not to inform us. If humans craved accurate information, there would be more balanced discussions, and not so much fiction. But we want entertainment and so the news must be dramatic to keep us tuned in.

Naturally, there are real problems we must face – I’m not casually dismissing them – but I also believe in the human spirit and our ability to adapt and overcome. We have seen time and time again that the market has a crazy way of doing the opposite of what’s expected. Two years ago today, what If I told you that a virus would shut down the earth and freeze our economy? You would naturally assume stocks would crash for the next two years. But we all know that the 2020 crash lasted just a few weeks and roared back.

I believe that in 2022, growth will start to get some much-needed love. Omicron is turning out to be more of a whimper than a roar. Vaccines are widespread, and now there are pills to help. By this time next year, I believe we will see a big lift in stocks, specifically growth stocks, as supply chain issues start to ease.

There will always be stuff to worry about, but that, too, might be remembered through a different lens.

Time heals all wounds. As Kevin Parker once said: “Eventually terrible memories turn into great ones.”

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

Please see important disclosures below.

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My 10 Slightly Boring Predictions for 2022

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Sector Spotlight by Jason Bodner
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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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