by Jason Bodner
January 3, 2023
Making predictions is tough. But the truth is – there’s little harm in making outlandish ones because predictions have a “positive selection” bias. That means our bias leans towards the ones that pan out. People have a funny way of forgetting all the silly ones that don’t come true. But for the ones that do come true – they can make one’s reputation, become something amazing, and even seem supernatural.
Take for instance the fact that 14 years before the Titanic sank, author Morgan Robertson wrote a sea-tragedy called Futility, Or The Wreck of the Titan, in which an “unsinkable” boat named “Titan” sank after hitting an iceberg. Or how about the 1969 John Brunner story, Stand on Zanzibar, which detailed a 2010 African-American U.S. President named “President Obomi” 40 years before a guy named Obama.
Or what about Mark Twain predicting the Internet? In his 1898 short story “From the ‘London Times’ of 1904,” he wrote of a “telelectroscope,” which used the phone system to create a worldwide network for sharing information making “the daily doings of the globe… visible to everybody, and audibly discussable too, by witnesses separated by any number of leagues.”
Twain had a knack for seeing the future. He was born two weeks after Halley’s Comet appeared in 1835. In 1909 he said, “It is coming again next year, and I expect to go out with it. It will be the greatest disappointment of my life if I don’t go out with Halley’s comet.”
Twain died on April 21, 1910, just one day after Halley’s comet returned. Maybe he had a hand in making this prediction come true, as a closing practical joke on the rest of us. Who can say?
These predictions are hair-raising and fun. But when it comes to predicting financial markets – it can be a more frustrating game. History’s road is littered with people who got it wrong. But just as some of the above, the ones who get it right get elevated reputations – sometimes.
Today, I’ll make an attempt to peer into 2023 and see what may take place. To do this, though – we will need to look back in time. First, we’ll look back to the past few days and weeks. Then we’ll do a quick overview of 2022. Using that backdrop, we’ll try and frame out a possible scenario for 2023.
In August and September, I predicted that October through December would be strong for the stock market. While this prediction is a plus for me, it didn’t pan out exactly as envisioned. I used historical data and seasonality for over 30 years of history to arrive at my conclusion. October and November were very strong months. December has been a disappointment thus far – bucking the historical trend of a strong month for the S&P 500. But Q4 has still represented a 7.8% rally for the SPY thus far.
Part of the weakness in December is due to anemic volume. The Big Money Index has fallen sharply from its 2-month uptrend. We came within spitting distance of overbought but stumbled since December 1.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
One might immediately think that’s due to big selling. Intuitively, it makes sense. If indexes are in the red and price action stinks, then the BMI should fall, right? The answer is sometimes. The BMI has everything to do with unusually large volume pushing stocks up or down. The BMI has been falling this month because buying slowed while volume dwindled to low levels. There hasn’t been big selling dragging down the index, only a lack of buying and selling which slowed that big rise and reversed it.
How do we know? We can see it in the unusual buying and selling of individual stocks. This chart shows October and November flush with buying. Selling wasn’t noticeable – and still isn’t. But what is – is the drop in buying. It’s even more apparent with the chart of ETFs on the right:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Further proof of weak volume can be seen in this chart of signals by market cap for the last week of the year. It’s a very low signal count as the total for the week is roughly the daily average in normal volumes:
To my eyes, this means December’s pullback was on low-to-meaningless volume. That means, I can’t confidently predict the trend will continue lower in 2023. Not with the several studies I’ve quoted this year that show strong potential price action to come.
For instance, one study showed that mid-term election years are strong from November to April for the S&P 500. The average November-April S&P 500 returns for the 10 mid-term election cycles since 1980 are +12.9% with a +15.7% return for the full year following a mid-term election.
Despite recession fears and doomsayers, inflation is moderating, and the aggressive rate-hikes will eventually end. And even in the midst of rough markets, there is always opportunity. We can see this by looking back at sector strength and weakness. This is the sector ranking as of today:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The top tier sectors have been this way for a while – in fact most of the year. Below we can see the buying and selling by both sector and market cap from January 1st – December 19th, 2022.
Notice big buying in Energy, while selling was big in tech. This theme has dominated the year.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
And looking by market cap, we see something interesting. Any buying has been focused in the small to midcaps. Mega-caps (typically dominated by huge tech companies) has seen more selling this year:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As tech has been under pressure, passive index investors must sell large- and mega-cap tech to track their indexes. And as energy gains in concentration of the cap-weighted S&P 500, passive investors continue to buy those stocks as well. This sets us up for the coming year. Energy has wind at its back in terms of the Ukraine war and Biden’s use of the Strategic Petroleum Reserves. While it helped stabilize and artificially suppress oil prices, it’s unsustainable. Prices will likely rise again as demand increases in the Spring.
So, my vision for 2023 is as follows:
- The year will begin with continued strength in energy and continued weakness in tech.
- Small and mid-cap stocks will continue to attract capital. There is value to be found there, and the passive trend for the past decade is reversing. Tech was constantly bid, and energy was constantly sold. That has changed for now. Earnings are waning in tech and blooming in energy.
- I envision market strength resuming in quarters 1 or 2. The stock market is a forward pricing machine and often looks six months ahead. Similarly, I envision the back half of the year seeing demand resume for tech companies, perhaps not to the degree of the past decade, but there are undervalued companies that will see a return of strong earnings once inflation is curbed, and recessionary fears evaporate – which they invariably will.
As far as where alpha can be found for the coming year, my method remains unchanged: Identify stocks with the strongest fundamentals being accumulated by the world’s biggest investors. Look for companies with strong sales, earnings, and profits and manageable debt-levels with thriving businesses. And when those are being bought in an unusual way, that is a long-term winning recipe to find winners.
In 2022, they were energy companies; 2023 may be the same. Financials may thrive in higher-interest-rate environments. Tech may come back in the back half of the year. Either way, the cream always rises to the top and will drive sector strength and weakness, and stock leaders and laggards.
Ultimately that’s where I will have my eyes focused because the one thing that I can predict with absolute certainty: There is always an area of the market that rises. And focusing on the best fundamentals getting bought is where the best opportunity lays.
As far as predicting the future, Peter Drucker says, “The best way to predict the future, is to create it.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
My Top Market Prediction for 2023
Income Mail by Bryan Perry
Rally to Resume When Inflation Sinks to 1-Year T-Bill Yield
Growth Mail by Gary Alexander
Expect “Less of the Same” (Blessedly) in 2023
Global Mail by Ivan Martchev
M2 Growth Goes to Zero
Sector Spotlight by Jason Bodner
The Best Way to Predict the Future is to Help Create It
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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