by Jason Bodner
October 10, 2023
My mom once joked that I lack the emotional gene. Because I have a great ability to be objective and mathematical, that can come off as “unemotional.” It turns out that’s also a good thing to be if you want to quit smoking. According to an Ohio State University study in 2020, smokers with better math skills are more likely to quit. That’s because they can cite statistics about health risks, which convince them to quit.
I don’t smoke, but I wholeheartedly agree that certain situations are great for emotions and others aren’t. For instance, picking your life partner is a great arena for emotion. Picking your stocks – not so much. And in crazy times like these, it can help to have objective perspective, grounded in historical analysis.
Financial markets are causing a lot of anxiety now, mostly due to interest rates and inflation. The bond market is going haywire. Rates have skyrocketed. For instance, the yield on the 10 Year Note has spiked 45%. That translates to an inverse drop that ranks up there with some of the worst crashes in history.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The 30-year Treasury now yields over 5%, levels not seen since April of 2007 – over 16 years ago!
With the Fed Funds Target rate set at 5.00%-5.25%, the bond market is telling investors to expect higher rates for a longer time – or even worse, more rate hikes. This is bringing a lot of volatility to the stock market, but I remind you that October through December is historically the strongest time of the year.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We’re only one trading week into the quarter. Pay no attention to a weak opening. There is plenty of time for the month and quarter to end on a positive note. Given where things are – that wouldn’t be too hard.
Second, and more importantly, the Big Money Index (BMI) is nearly oversold. Last week, I told you that the earliest we could go oversold was October 4th (assuming zero buying). Well, we came pretty close to zero buying last week, and as of Friday, the BMI hit 25.3%. It should be officially oversold by now.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In an upcoming White Paper, we ask the question: “Do Outsized Money Flows Predict Forward Market Prices? If So, Can We Visualize Capitulation?” These are great questions, and the timing is perfect, because (without spoiling the paper’s conclusion), the answer is that we can. We start with the BMI touching that green oversold line. When that happens historically, expect a big rally. Looking at the table below, we see the 24 times that the BMI went oversold since 1990. Notice anything? You should see a lot of green. A vast majority of instances saw equity markets materially higher 1, 3, 6, 9, and 12 months later.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That’s great news if it plays out as strongly as it has in the past. So, what does capitulation look like? We went over the BMI, but what feeds that is unusually large buying and selling of stocks and ETFs. So, we would be able to see that scream to us that the bottom is near or here. Sure enough, the picture is striking. In the charts below we see the level of selling for asset class is very high – I dare say unsustainably high:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
And bad as this selling may seem, it’s not even close to what we endured during the COVID crash:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
To further visualize capitulation in progress, let’s look at outsized buying and selling, broken down by market cap. Below left we see all unusual buying and selling since August 1st of 2023. Notice the pain in small and mid-cap stocks but, more importantly, the sells outnumber buys by more than 2.6 to 1.
To the right we see January to July, where buys outnumbered sells 1.5 to 1:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Finally, let’s look at the breakdown of buying and selling by sector. We don’t need to go into the strength and weakness of each sector. All you need to see is that everything is under pressure. When that happens, usually something breaks. It’s often the will of weary investors who throw in the towel. Tech and energy were the only somewhat resilient sectors recently, but they too have come under the spell of selling:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We also see in the charts above that Utilities and Real Estate are clearly oversold. Staples, Health Care, Financials, Industrials, Materials, and Discretionary are arguably at or at least near oversold themselves. Energy looks near-term oversold.
The emerging picture is clear: the BMI is at oversold levels. Stocks and ETFs have reached levels of extreme selling. Virtually all sectors are oversold. While this may all sound bad, when we fold in our bullish indicators, things start to look brighter. History says that when the BMI goes oversold, markets are materially higher in the weeks and months afterwards. History also says 75% of the time October through December are the brightest months of the year, market performance wise.
The bottom is near or here – or so the historical data tells us. As investors, it’s important to keep emotions out of our process. If we look to instinct to guide us, it could serve us badly. This is when it pays to lack the emotional gene – and refuse to buy into the negativity of the news media.
Remember: “The optimist sees the doughnut, the pessimist sees the hole.” – Oscar Wilde
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
What’s Behind the Latest Bond Rate Increase?
Income Mail by Bryan Perry
Geopolitical Risks are Net Bullish for U.S. Assets
Growth Mail by Gary Alexander
What’s Next: Inflation, Deflation or No-Flation?
Global Mail by Ivan Martchev
We Retested the S&P 500 200-Day Moving Average Twice Last Week
Sector Spotlight by Jason Bodner
Emotions Have No Place in Picking Stocks… or Market Turns
View Full Archive
Read Past Issues Here
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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