January 7, 2020

I asked my 15-year old son how he felt on New Year’s Day.

In teenage blasé, he said: “Earth just completed another orbit around the sun. Yea.”

That’s my boy.

I’m not a fan of New Year’s Day, either. It’s just another day. Another rotation of our home: a dust-ball with water and carbon-based life forms. Probability says there are billions like it scattered through the universe. My birthday and Earth’s birthdays are meaningless. Other planets have totally different years. I feel better knowing I’m 24 on Mars opposed to 45 here, because a Martian year is 1.88 Earth years.  So, if you want to stay young, quote your age other planets. I’m 4 on Jupiter. That’s my New Year’s gift to you.

Happy Birthday, Earthling Image

Markets are dynamic day-to-day, but they are subject to human “birthday” events, too.  Take the January Effect. It’s a perceived increase in stock prices during January. Analysts think it happens after December price drops due to tax selling. For 2019, the market was up 30+%, so there was little to sell at a loss, so 2019’s tax-loss-harvesting-to-offset-capital-gains-prompted-sell-off never happened. Maybe investors used year-end bonuses to buy stocks instead, because 2020 started up-up-and-away.

I’ll continue to be the party-pooper and say, “this market is overbought.” Mapsignals’ Big Money Index measures unusually big buying against selling in U.S. stocks.  On 5,500 stocks, big-money signals happen roughly 100 times daily; usually 60 buys and 40 sells. The measurement smooths on a 25-day moving average: 60% is a healthy ratio. Anything under 25% is oversold, foreshadowing a market rip. Anything over 80% is unsustainable and precedes a pullback within days or weeks.  That’s where we are now.

Where We are Now in Buying Image

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

Here’s what I believe: it doesn’t matter what month it is. The tale of the last two Decembers tells that perfectly. December 2018 and 2019 couldn’t have been more different. Don’t fixate on the time of year.  Seasonality is real, but I think of it more like a derivative, meaning it doesn’t matter when we are. What matters is what Big Money is doing.  Are they buying or selling? What is the balance of money flows? How long can it last? I believe the answers to these questions hold the keys the market’s next moves.

What Big Capital is Telling us Now

For stocks, buying persisted through the end of 2019 and into 2020. Heavy buying happened in Energy and Infotech.  Keep an eye on Energy as it was so depressed last year.  We are starting to see big capital plow into those stocks. Last week 30% of the Energy universe (91 institutionally tradeable stocks) logged buys.  Look for fundamentally and technically superior energy companies. Tech companies saw Software stocks getting some love. Buying was even across the board. I believe money managers must put new money to work. As bond yields remain low and perceptions of recession wane, it’s risk-on for equities.

Map Signals Table

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

Maybe most interesting is the mammoth ETF buying. The last time we saw buying like this was January of 2018.  That prefaced a volatile year for stocks.

Standard and Poor's 500 versus MapSignals ETF Buys and Sells Chart

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

That’s only one data point, so I don’t necessarily expect the same for 2020. Below is the chart measuring ETF big activity since 2005, the year ETFs took off in popularity.  I wrote a white paper on how I believe that’s when the tide turned, specifically that’s when ETFs began to dictate markets; not react to them.

You can find that paper available at Navellier & Associates here.

Standard and Poor's 500 versus MapSignals ETF Buys and Sells Now Chart

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

The circle to the right is now. Notice, ETF buying is good longer term. This makes sense: big buying pushes prices up. But when buying stops, the market has to pause, drop, and reset. Red spikes are when everyone freaks out together. They throw babies out with the bathwater, as in the financial crisis of 2008-09. That’s when to buy. As Warren Buffett said: “Be fearful when everyone is greedy and greedy when everyone is fearful.”

We’re overbought now. All we need is volatility to nudge stocks into corrective behavior. As managers invest into the January Effect, it lures in investors.  When they stop buying and there’s a volatility catalyst (an airstrike on Iran?), the market could get cranky. That’s when to have your shopping list ready.

Like I said, now isn’t the ideal buy-time. It’s likely better to take risk off or do some hedging.  The opportunistic buyer does not want to buy high.  To be fair, as John Maynard Keynes said: “Markets can stay irrational longer than you can stay solvent.” That means we can stay overbought for a while.  I still think we start to see faltering equity prices within a week or two.  That’s based on my 30-years of data, not just a hunch. But nothing is set in stone.

There’s one key point to remember though: TAGU. When you buy great companies, over time they all go up (TAGU). It’s our mantra at my research shop. It’s the basis of my July 2019 report for Navellier & Associates, Zombie investing. It’s the key to wealth over time. Don’t focus on your age, or the Earth’s age, or the time of year.  Focus on where the big money is going, and when you can buy TAGU stocks.

It works whether you’re 4, 24, 45, or older…

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