by Jason Bodner

October 12, 2021

There are always forces arrayed against you – and they generally know your weakest spots.

For instance, many smokers make a New Year’s resolution to quit smoking, so tobacco companies spend their highest advertising dollars in the month of January. Clearly, they don’t want smokers to quit.

This applies to the markets, too. Despite the market’s gains over the last 100+ years, our historical fears often resurface during the month of October, due to memories of 1987 and 2008, and stories about 1929.

On a good day, headlines are full of the debt ceiling, inflation, and taxes. On a bad day, news can be much worse, and the stock market can make you sick. In October, there’s also talk of stocks waiting for a crash.

The sad truth is that good news doesn’t sell very well. Bad news jolts your attention. This is exactly what advertisers want. Otherwise, you’ll never see their messages, designed to get you to buy their products.

A major network news producer once told me that networks live and die by advertiser dollars, and there are three ways to guarantee viewership. As she put it (forgive her candor), they are “nuts, guts, and sluts.”

What she meant is that the lead story will either be about some madman’s shocking actions (he’s nuts), a horrible accident or ghastly murder (with guts), or a juicy sex scandal (you get the connection there).

That formula works wonders on your local nightly news, but also for the leading financial media, so if you want a quiet ride to wealth and a comfortable retirement, do yourself a favor: Don’t watch the news. Their ultimate goal is to sell you some brokerage platforms, banking products, or an array of other sponsored messages, but to get you to watch those messages, their best tool is to scare you.

I believe the bearish pundits, experts, and talking heads are all wrong, but it’s hard to argue with them recently. Given growth stocks’ ugly summer, even I sometimes wonder if they will ever rally again…

They definitely will, but before we dig into that, let’s discuss the current choppy market. Tech stocks will rip, then dip. Value screams, then gets creamed, so 2021 might go down as The Year of Rotations.

Last Week’s Market Action in Context

Last week saw much of the same. Scary inflation and interest rate headlines fueled trader anxiety. (That’s often when high-quality growth stocks get smoked.) On the other hand, energy stocks have been flying on weak fundamentals and crazy technical strength. But to really see the market, I like to check in on the Big Money Index (BMI). It might have troughed. As you can see, it’s been mostly sideways since February.

This 1-year chart of the SPY (S&P 500 tracking ETF) shows a defiant index.

Big Money Index versus SPY Chart

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

But remember, the S&P’s superior performance is due largely to five large stocks propping it up. They account for more than 25% of the weight of the index. Removing those stocks and looking at the Russell 2000 (IWM ETF), we see a different story. Small-cap stocks have lived in a ~10% range since February:

Big Money Index versus Russell 2000 Index Chart

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

Last week, though, showed some inspired optimism: Selling is slowing, and we are seeing buying of stronger fundamentals like growth stocks. Next, looking at the stocks themselves, we see slowing selling with shorter red bars. For my money, that means less pain for growth and tech stocks.

Big Money Stock Buys and Sells Chart

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

Notice the monster buying in Energy stocks? Monday, October 4th saw the biggest energy buying in 7 years. Buying is great, but reckless buying can cause damage. Comparing last Monday to other huge energy buy days, we see a negative pattern. Buying like this usually means an energy stock pullback is near. Monday showed 82% of our Energy universe logging buys. Here we see prior days with 50%+ buying in the sector. Notice that XLE (Energy Select Sector SPDR Fund) tends to pull back a month later:

Huge Energy Buys Table

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

We feel the buying opportunity for energy stocks has likely passed. The energy binge is slowing, but that is good for growth, because portfolio managers must look elsewhere for opportunity. The recent juice of strong fundamental stocks suggests growth stocks will rally again.

All the bad news circulating these days may have you wondering: Should I dump my stocks?

You should really ask: Are we just getting started?

Get Ready for the Next “Roaring 20s”

In my best Biden voice, let me say: “Here’s the deal!” I think we are heading into the next Roaring ’20s. The last major pandemic was the 1917–1919 Spanish flu. Then came a sharp, short recession and market crash. We emerged into a boom in the economy and rising personal wealth.

Currently, we are emerging from lockdown, economic hampering, supply-chain disruptions, and pent-up demand. I believe we’re on the cusp of a similar boom.  In the 1920’s, the Dow Jones Industrial Average was the equivalent of the NASDAQ today. It was filled with new industrial companies.

Today, we think of the Dow industrials as boring stocks. But back then, they were the growth engines. Think of all those companies suddenly producing cars, radios, and airplanes – great new stuff!

These new toys and tools were the technology growth companies of the time.

Today, we have the Nasdaq Composite Index. It’s loaded with tech-heavy companies and has been the growth engine for stocks for years now. For example, almost anything you touch, look at, ride, or use today is packed with tech, like semiconductors, software, and other electronic components.

Many wonder how it can continue… but I wonder how it can’t.

Just look at the chart below, showing the Dow Jones from January 1921 until December 1925 next to the Nasdaq from October 2015 until now. Each period was 60 months… and each period rallied about 115%.

Dow Jones Industrial Average versus NASDAQ Chart

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

Pretty amazing right? What’s shocking is that the Dow Jones went on to rally another 150% in the following four years. Will history repeat itself?

Dow Jones Industrial Average versus NASDAQ Possible Future Chart

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

I believe so. I don’t think stocks will crash – they will dash. And growth will lead the way.

For the bears trying to push against the forces, I remember the principal from The Breakfast Club, who told the students, “Don’t mess with the bull – you’ll get the horns.”

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

Please see important disclosures below.

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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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