by Jason Bodner
October 3, 2023
I have good news and bad news for you. Which do you want to hear first? Apparently, it matters which one you hear first. According to one psychological study, people who get the bad news first end up in a better mood after hearing both. Those who get good news first aren’t likely to be encouraged in the end.
So, bad news first then? We might not be out of the woods just yet. September has been an ugly month for the market with the S&P troughing down 4.9% from August’s close, and NASDAQ down 5.8%. Most would say, “OK, that’s over! Thank you!” But based on the latest readings from the Big Money Index (BMI), the storm might not have passed just yet. Having a good October doesn’t mean the good news starts on the first day of October. We didn’t bottom out in the S&P 500 until the 12th day of October last year.
The BMI on September 28th was 35.7. The bad news is that it is still falling. In the table below, we give some insights into how the BMI is calculated. Each day has a buy/sell ratio. The BMI is the 25-day-moving-average. As sellers have taken control, and buying has waned, the BMI has unsurprisingly fallen.
And it continues to fall. History tells us that lower prices accompany a falling BMI. If I “force” the BMI into oversold territory (25% or less) by hypothetically having 100% sell days in the coming week, the soonest we can go oversold would be October 5th. That means potentially another ugly week ahead.
That’s the bad news…
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Or is it good news, after all? September is over, and October through December are contributors to the best quarter. I’m sure you’ve seen this chart before, but here’s another look.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Another reason why a near oversold BMI is good news is because, if you’re familiar with the BMI, you’re familiar with what a powerful forward indicator it is – especially when it hits oversold levels.
Forward returns are significantly higher by an astonishingly high percentage of the time after the BMI goes oversold. The average forward returns are in the bottom boxed portion of the chart below.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We see this in the past 12 months, below. When the BMI goes oversold – markets tend to zoom thereafter:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We see this again when we look at a 3-year chart of buying and selling. We see clearly that extreme selling (the huge red bars) preface market rises thereafter:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The possibility remains that we don’t in fact, go oversold, just like in April, above. We came close, but when buyers stepped in and reversed the tide of the BMI, it was huge rally.
Since the BMI went oversold last October 12, the S&P 500 gained nearly 21%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
You can also see that, despite the summer volatility, all indexes above, save one, are up since then, many of them substantially. I have boxed the best performers in blue. They are mostly growth areas.
Yet, while we look to the future, we shouldn’t ignore the present. There has been some wicked selling going on lately. There has been only one real bright spot: Energy. You can see clearly that this single sector is the only one showing signs of life. On the flip-side, all other sectors are feeling the burn.
Utilities and Real Estate, in particular, are getting clocked.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Ugly as that may seem, when Utilities get sold into oblivion, like right now, it prefaces a pretty swift snap back, as can be seen in the 3-year Utilities chart below:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
These typically yield-intensive securities also have the happy side effect of providing exploding dividend yields as the stocks get pummeled. This makes them more and more attractive the lower they go.
And let’s be real here: Utilities won’t go away. We all need power in our homes and our lives.
Utilities and Real Estate are just the worst of the market-wide (excepting energy) selling that we are experiencing. I write this off to typical summer shenanigans.
I predicted this in July, as the market was busy frothily peaking. Since August 1st, look at the amount of sell signals. And look how they are all almost exclusively concentrated in small and mid-caps:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is where I see the opportunity for a fourth-quarter recovery coming. Again, this is based on decades of strong seasonal historical data. But as the season turns the page into fall and winter, I expect a strong tech-led rally with concentrated buying in the small and mid-cap regions, starting likely in November.
There are already some signs the tide is turning. Since September, the market was worried about a government shutdown. Apparently, that’s in the rear-view mirror. Rate hike fears, geopolitical tensions, and all the usual monsters are still under the bed. But this will always be in the background until we are all no longer monitoring market noise. Fear and greed are still the life blood of the stock market.
This is all well and good, but I live by data. The data says we are in a BMI downdraft which means possible near-term pain and then multi-month gain. So now is the time to start identifying deals you may want to take advantage of. While there are no guarantees in life, the landscape is tilted asymmetrically in favor of price appreciation in the near future. That’s not only rare, but it’s reliable and accurate.
I am looking at oversold areas like semiconductors, utilities, health care and discretionary stocks.
Don’t let the bad times scare you or ruin your day. Each day we are here is a good one! It makes me reflect on Led Zeppelin’s generation-changing tunes. One stanza, in particular, seems to fit today:
In the days of my youth
I was told what it means to be a man.
Now I’ve reached that age.
I’ve tried to do all those things the best I can.
No matter how I try,
I find my way to the same old jam.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Crude Oil Prices Reach a 13-Month High
Income Mail by Bryan Perry
Lower Inflation May Not Mean Lower Treasury Yields
Growth Mail by Gary Alexander
The Fourth Quarter Explosion is About to Start
Global Mail by Ivan Martchev
The Selloff in Stocks is the Fed’s Fault
Sector Spotlight by Jason Bodner
October – the Good News and the Bad News
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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Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.
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