by Jason Bodner
October 18, 2022
The old joke goes something like this:
Me: How bad is it doc?
Doc: Well- you’re very sick.
Me: Can I get a second opinion?
Doc: Sure. You’re ugly too.
Ba-dum-dum-ching!
But seriously, how bad is this market? The bears see it as not bad enough, yet. The fearful will run for the hills. The bulls see this as an overreaction. But if it is an overreaction, is that normal?
Yes, according to evolutionary psychologists. Overreacting is our natural display of power to a potential threat to prevent serious harm that may come from the same source. Evolution built overreacting into animals and humans through what they call psychological “updates.”
To get a better understanding of what the coming months have in hold for stocks, it helps to contextualize today’s situation. Naturally, I believe the data is the only way to contextualize anything.
So today, we will look at similar times in the market over the past several decades and compare them to 2022. We’ll also have a look at the weekly action: what caused the latest volatility? When might it end?
Let’s start with the bad news. Stocks finished September with a brutal beating. The Big Money Index (BMI) went oversold on September 30th. History tells us to expect a market bounce, which is exactly what happened: Just two trading days later, on October 4th, the SPY (S&P 500 tracking ETF) closed 5.8% higher than September’s close. But by October 11th, hotter than anticipated jobs data brought the market back down lower than September 30th. In our current bizarro world, bad news is good, and good news is bad. So, when jobs data came out stronger than expected, that helped solidify investors perception that the Fed will continue to be aggressive in their rate hikes. Then on October 13th, we saw a huge one-day rally: +2.6% in the SPY. This was a stunning intra-day reversal after a CPI report came in worse than expected and stocks started down as much as 3% on the NASDAQ. People speculated that perhaps it was now peak inflation. This quickly gave way on Friday as stocks frittered away what was made back on Thursday.
This type of volatility makes people wonder if they should be investing in stocks in the first place.
Now let’s take a look at how last week compared with the past six months. As you can see in this chart, despite all the wicked volatility, selling has not been as extreme as in months past. Even though stocks are bouncing along the bottom, the red bars are becoming less intense, a possible signal the end is in sight:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The question remaining for investors is this: “Where is it safe to hide?” According to our data, the strongest sector remains energy. It has been this way for most of the year. Energy ranks very high technically and also fundamentally.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
What’s interesting is that FactSet projects energy companies to have stunning sales and earnings growth next quarter. This is in a market in which earnings growth is largely expected to slow. The expected earnings growth for the third quarter in energy is +117%!
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Industrials, real estate, and (surprisingly) consumer discretionary stocks are the three other sectors expecting earnings growth for quarter #3. But for the S&P 500 as a whole, estimates have fallen to 2.4% growth. If it stays, that would be the slowest growth in earnings since Q3 2020.
But I must point out that actual earnings tend to beat estimates by a wide margin. Based on projections of prior positive earnings surprises, we might see actual growth of 6-7%. Should that be the case, that’s a bullish catalyst in this bearish sentiment at market lows.
Something very rare happened last week: The Big Money Index went oversold for a fourth time in a year:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I went back in my data and looked at all prior times in which the BMI stayed below the oversold threshold of 25%. I summarized them all below in a table, but here are the key points:
- There was only one other year in which the BMI went oversold more times. That was 2008 (6 times).
- This year the BMI has been oversold only 4% of the time (8 of 198 trading days). Compare this to 2008, when it was oversold 32% of the year (81 of 253 trading days).
- Since 1990, the BMI has spent only 3.8% of the time oversold (308 days out of 8,236 trading days).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Here’s something else you should notice: The reasons attributed to the market weakness that caused the oversold instances are familiar. In fact, you could grab a headline from 30 years ago and it’s likely very applicable to today. Many seem interchangeable over various stress points in the market. I’d argue that in the past two years we’ve seen many of the prominent headlines over the past several decades, if not 100 years, repeat themselves – subjects like inflation, interest rate fears, Russia invading Ukraine (again), global slowdown fears, and still lingering talk of a pandemic, which last gripped the world a century ago.
Next, let’s look at how this year is shaping up compared to other down years. We can see that it ranks up there with many of the uglier years in history – as the third worst year since the 1930s (so far, at least).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
But here’s the silver lining, folks: History shows that we have much better times to look forward to. In the chart below I plotted all of the times the Big Money Index was oversold in that table above. It’s very clear to see that most of the time these oversold instances aligned with market troughs:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Please note: That chart includes Russian bond defaults, LTCM’s collapse, 9/11, recession fears, currency crises, major company accounting frauds, debt contagions, inflation fears, taper tantrum, Ebola threats, the great financial crisis, flash crashes, trade wars, real war, and a global pandemic shutdown.
We will get through this too, because we got through all the rest just fine. All any one of us can do is wait for the Fed’s policy decisions to have an effect on inflation. As soon as we get an acknowledgment from Fed chair Jerome Powell, that will be the “all clear signal” that investors can start the next bull market.
You may think: “Jason, you’re being insufferably positive.” But history gives us reason to be optimistic. In the words of the Dalai Lama: “In order to carry a positive action we must develop a positive vision.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Inflation Stays Stubbornly High, So the Fed Will Likely Stay Aggressive
Income Mail by Bryan Perry
The Fed Needs to Hear the Sound of Something Breaking
Growth Mail by Gary Alexander
Hurricane Season is Almost Over – In New Orleans and on Wall Street
Global Mail by Ivan Martchev
Where the $6 Trillion Came From
Sector Spotlight by Jason Bodner
But Seriously, Doc, How Bad is This Market?
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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