by Jason Bodner

October 4, 2022

Last week’s volatility was wicked. Tuesday showed wild up-and-down intraday trades. Wednesday brought hurricane Ian on a direct collision course with Florida’s West Coast. It was a large storm, delivering the energy of 10 Hiroshima-size atomic bombs every second. Our thoughts go out to folks digging out from a near-category 5 storm. (I live on the southeastern coast of Florida, so I just got wet.)

As the hurricane hit American soil, however, the market staged a brief but strong relief rally Wednesday, because the Bank of England made a surprise move to buy bonds. They said they would buy “unlimited” amounts of gilts (bonds) until October 14, thereby providing liquidity to an ailing system over there.

Overall, investors are overreacting to negative news. The reason the stock market fell hard again on Thursday and Friday is because the economic data came in “hotter” than expected. First came high inflation numbers: The GDP price index for Q2 was 9.1%, above the previous 8.3%. That means inflation is getting worse, not better. Real consumer spending came in at 2% versus the previous 1.5%. Ironically, the Fed wants people spending less, not more. GDP sales for quarter #2 came in at 1.3%. Corporate profits came in at 6.2%, quarter over quarter, versus a consensus 9.1%, so consumers continue spending while corporate profits are falling. The personal consumption expenditure (PCE) inflation index came in at 7.3%, higher than forecasts of 7.1%, and the core PCE (excluding food and energy) came in at 4.7% vs. 4.4% expected. This shows inflation intensifying. Investors take that to mean more tightening ahead.

But are these worries getting overdone? A few data points say we are close to a bottom, if not near the final flush. First – stocks are oversold. I monitor 6,025 stocks each day, and 4,803 of them were below their 50-day moving average as of last Thursday, meaning nearly 80% of all stocks are oversold.

Among the 1,222 stocks not oversold, surprisingly financials lead with 707 stocks above their 50-day moving average. A distant second are healthcare stocks with 202 above the 50 DMA. Many of these stocks, however, are smaller-cap securities. The average financial stock trading above the 50 day MA is valued at less than $1 billion. Here’s how stocks shake out versus their 50D, 100D, and 200 DMA:

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

According to Bespoke Investment Group, all of the indexes they monitor are oversold. That includes the Dow Jones Industrials, Russell 2000, S&P 500, NASDAQ, micro-caps, small-caps, mid-caps, and even the total stock market ETF (VTI) – all are heavily oversold; all are well below their 50 DMA.

All 11 S&P sectors are oversold, with consumer staples and real estate being extremely oversold.

That points to unsustainable stock selling. And the BMI concurs… the Big Money Index went oversold first on July 14th. Like clockwork, the SPY (S&P 500 tracking ETF) rallied by 12.5% shortly thereafter. Only a month later, on August 17th did the BMI go overbought above 80%. The SPY fell 14% thereafter.

The BMI has been dropping ever since…

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

As of Friday’s close, the Big Money Index is once again oversold for the third time in 2022 – that has happened only once before, in 2008. Sellers ran rampant with close to 1,300 Big Money sell signals and just 21 buy signals on Friday. Let me remind you of the forward returns when we see an oversold BMI:

  • 1 month  +3.1%
  • 3 months  +5.2%
  • 6 months  +9.2%
  • 9 months  +9.6%
  • 12 months +15.3%
  • 24 months +29.8%

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

Those are the averages of the 22 oversold BMI instances since 1990. Time will tell what’s to come, but the odds are in favor for positive returns.

When stocks and ETFs get sold at these extreme levels, it usually signals a near-term market low. We saw stock selling at this level in January, March, May, and June. And each time the market rallied afterwards.

The same goes for ETFs. In fact, September’s ETF selling is the second highest we’ve seen all year. Historically, selling like this usually coincides with a near-term low:

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

We have a deeply oversold market, an oversold Big Money Index, unsustainable stock and ETF selling coupled with peak fear and bearish sentiment. In late August, I said Septembers are historically weak. But fourth quarters are very strong. Since 1990, the average monthly return of the S&P 500 in September is -0.5%. But October’s average is +1.4%, November’s is +1.8%, and December’s is +1.5%.

What’s really interesting is that the Fed will likely raise rates in November, which is uncharacteristic of past Fed behavior. That’s because they typically don’t meddle with elections. But with continued hawkish talk and an expected rate hike, they are all but handing Congress to the Republicans. This is interesting because average returns in October and November during mid-term election years are historically strong. Looking at mid-term election years since 1990, Octobers average +2.5% and Novembers average +2.4%.

All this history points to a grossly oversold market, meaning that we will likely see a big bounce through the end of the year. It may not seem likely right now, but when everyone is miserable and fearful, that usually means the bottom is in sight. The Fed doesn’t want to cause a horrible recession, but they must fight vicious inflation, so their tough talk and hawkish tightening policy is aimed at doing just that.

For now, the best defense is in the most resilient stocks, and the strongest sectors continue to be energy, utilities, staples, and health care.

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

Getting into specific sub-sectors, the top-ranked energy stocks are in oil and gas. Top-ranked financials are securities and trading services, plus insurance companies. Healthcare strength is in oncology and biopharmaceutical companies, for retail, it’s food and beverage stocks. In tech, select semiconductors are rising to the top again.

In summary, we have a grossly oversold market at or near the bottom. Despite last week’s ugly action, there are positive signs on the horizon. After the BMI hit oversold last Friday, a big bounce should come soon afterward. That could spark short-covering and an extended rally for several weeks into earnings season, and into a historically positive year-end. As Thomas Fuller said, “It is always darkest just before the Day dawneth.” That may not be technically true, but it sure feels that way.

Storms in markets and a powerful hurricane are emitting darkness. That means the sun may rise soon.

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

Please see important disclosures below.

About The Author

Jason Bodner

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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