by Jason Bodner
October 31, 2023
There are bears and there are bears. We all know the iconic Grizzly bears that litter explorer movies. They are always portrayed as big, ferocious. and with nasty claws. We’ve seen Polar bears in documentaries about climate change. There are eight species of bears, the benign stuffed animal-like Panda being one.
And now there are mixed Grizzly and Polar (‘Grolar” or “Pizzly” bears) popping up. As the climate shifts, apparently the changing habitats foster new romances.
Well, when it comes to defining the stock market, there are bull markets and bear markets, but logic and experience tell us that it doesn’t just stop there. We’ve seen “bull market rallies within bear markets” and vice versa, meaning there are Grolars, Pizzlys, Bull-bears, Bear-bulls, Baby bears and Mega-bulls.
That brings me to our unsettling recent market action. We are now extremely oversold. The Big Money Index (BMI) has fallen to oversold levels not seen since April 2020, a major market bottom:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When that happens – forward returns have been outstanding. More on that in a moment, but first let’s rip off the band-aid and take an honest look at the recent market damage…
Selling looked like it was over during the week of October 9th-13th. That would have been right on schedule, as history suggested, October is a seasonally strong month. Had a rally ensued, it would have been consistent with market history. It started that way, but that was a head fake, and the bear claws ripped through markets last week, too. Selling resumed heavily on both stocks and ETFs:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Last week’s pressure was focused in small- and mid-cap stocks, but that has been the theme since August. Below, we can see how much destruction has taken place, when we substitute the Russell 2000 for the SPY (the S&P 500 ETF) in the chart above:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This makes sense when we look at the distribution of selling across company size since August:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This selling hasn’t really spared any sector. This is bad news, of course, because a widespread selloff is miserable to sit through. It causes heartburn and anxiety. But it’s also good news. Because it brings us closer to a bottom, so we can get on with our lives. Here’s how sector strength and weakness shake out:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Energy is still sector leader, the only one without significant selling. Technology has been holding up well, but it has finally come under pressure. In fact, nearly every sector is seeing red. Discretionary, Industrials, Materials, Financials, Communications, Health Care, and Real estate have all come under attack:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When we look at stock prices and see that they seem to melt every day, it’s really uncomfortable. I feel myself getting anxious and worried. That’s the time to have a game plan dictated by logic and informed by data. The relevant data says that brighter days are ahead, with the odds overwhelmingly in our favor. The immediate future is unclear, but logic says the markets are near a bottom and we should remain calm.
When a plane hits turbulence, we don’t rush for the emergency exit mid-air. Why then, should we do the same with our investments? Times like now have proven to be, historically, an excellent time to buy.
Using the BMI to time market lows has been extremely effective over the years, but trying to nail the BMI to the exact day only works once in a while – not this time. It’s like predicting when your kid is going to grow above 5 feet tall. The law of averages says, it’s around age 11 or 12 years old. But what happens when your kid is 13 and it hasn’t happened yet? Logic dictates it is a near certainty but when it’s not on time it’s disconcerting all the same. In this case, the averages said that the BMI would lift from oversold (on average) October 24th at the earliest. Clearly, that didn’t happen. But since 2016, every time the BMI fell to this level, all 18 of them, forward prices were higher 1,3,6,9, and 12 months later.
The average returns were stunning:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
If we go back further, we find similar profits. Going back to 1990, we see 129 instances of the BMI below 19 (currently, it’s 18.1) and the averages are still excellent. The 1-year returns were positive 100% of the time. This includes 1998, the tech bubble, 9/11, the Great Financial Crisis, and any crisis you can name since 1990. A year after a BMI of this level, the market was higher every time for an average 24.7% gain.
Investing using emotion would work well if we did the exact opposite of what we feel most of the time. Fear is high right now, and looking at daily price gyrations can be woeful. The plan should now be to identify great stocks on sale – ones with superior fundamentals being punished with overall market anxiety. The forward returns above tell us we have big asymmetrical upside if we buy stocks down here.
But what should be clear, I think, is that it’s time to make our shopping lists. The message is, Stay calm and use our logic-based head, and we will prevail and thrive. If we succumb to fear and make ourselves think that we feel better, history says it’s an opportunity wasted.
The Grolar-Pizzly is slashing its claws through stocks right now. The question is, What will you do about it? Epictetus said, “It’s not what happens to you, but how you react to it that matters.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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A Look Ahead by Louis Navellier
As GDP Peaks Near 5%, Is This the Last of the Booming Quarters?
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Treasury Secretary Janet Yellen Is Talking Her Book
Growth Mail by Gary Alexander
When PIGS Fly: Europe’s Basket Cases Recover, While the U.S. Drowns in Debt
Global Mail by Ivan Martchev
Initial Signs of a Treasury Yield Top
Sector Spotlight by Jason Bodner
What Kind of Bear is This – Or is it a Bear at All?
View Full Archive
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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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