by Jason Bodner
November 1, 2022
Investors always want a reason to buy something. It’s only logical: “If I’m going to risk my money, I need to know why!” This is true when it comes to established stocks or securities. There’s a large body of evidence to scrutinize. But that’s not necessarily the case with new-fangled ideas. Take cryptocurrencies. Investors needed no reason to drive up Dogecoin, which the inventor himself said was created as a joke.
But even sound reasons don’t always translate to value. Take for instance the following fact: Just 2.5% of the earth’s water is fresh, but humans have access to only 0.007% of this water for drinking and bathing. We’d die sooner from thirst than starvation, so why isn’t water the most valuable commodity on earth?
The value of gold is around $1,650 per troy ounce. At my local store, a gallon of drinking water is $0.99. On a weight-adjusted basis, the shiny metal is worth 200,000 times more than an essential fluid for life. It costs less than a cent to buy an ounce of water and $1,650 to buy an ounce of gold. Does that make sense?
So, when it comes to matters of value, we think we have it right, but clearly our priorities can be out of whack. This is why I invest the way I do, using quantitative data analysis. I know that sounds boring, but if humans can prioritize bling over basic survival, how can we trust our hunches in valuing stocks?
Well, we can’t, is the answer… And that’s why data prevails. For instance, the macroeconomic environment is pressuring tech stocks and lifting energy stocks. I think it’s safe to say, our reliance on technology will only intensify, not deliver us back to the Stone Age. But valuations are what they are.
It’s been evident since the beginning of the year. Here we can see the energy sector vs. the tech sector:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Notice that energy clearly has more blue (denoting buying), while tech has a lot of red/selling. I may think that tech is more valuable than oil, but that doesn’t matter. Since the beginning of 2022, energy accounted for 18% of all unusual stock buying, while technology accounted for 19% of all unusual stock selling:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
To quote an annoying banality: it is what it is. The world may believe ESG stocks are better for our future and environment, but that doesn’t mean they are worth more than the oil stocks right now.
The technology involved to create clean energy may be superior to drilling oil out of the ground, but so what? Energy is still ranked as the top sector in terms of technical strength, despite its mediocre fundamental score, while tech is highest ranked fundamentally, but near the bottom of the tech bin:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
What now? Some say: “Earnings are horrible: Look at Amazon and META.” Or, “We are in a recession.”
Well, I’d point out that we are not yet clearly in an economic recession, even if we are in a collective emotional recession. And while a few bellwether stocks have been caught flat-footed, earnings are largely working. According to FactSet, 72% of reporting S&P 500 companies beat earnings estimates, while 70% beat revenue. Only 20% (100 of the 500 companies) have reported, but that’s a good start.
Recent data shows that despite the gloomy mood, investors are buying stocks again. We see the Big Money Index (BMI) went oversold on October 13th, the day of the most recent low, and then it popped up above oversold again on the 24th. Once again, an oversold BMI has usually prefaced a rally in stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is because of two dynamics: Buying is increasing but selling has greatly diminished. Here we can see the unusual buy and sell signals for stocks on the left. Notice how the red slopes up away from what is likely the bottom while blue is taking over? We see a similar vanishing act for sellers in ETFs as well:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Furthermore, what interests me is that while mega caps crumble in large tech from poor earnings reports, the buying that has been going on under the surface is in small and mid-caps this past week.
Look at how the buying is heavily weighted in the smaller stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Would it surprise you to find out that the biggest buying in the past week has been in energy? Maybe it shouldn’t by now. Also, look at how financial stocks have been getting scooped up, too.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
And when we look at the quality of stocks getting bought this past week, we see high-ranked stocks are getting scooped. Below, you can see a table of stocks bought by sector, and what percent of those stocks bought were 70 or above in terms of overall score. Also notice the stocks with the strongest fundamentals getting bought are not the leading sectors. For example, technology and materials stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Does this mean a resurgence for weaker tech stocks? If you go by headlines of notable earnings misses – probably not. But if we agnostically look at the data, a different picture might emerge. It’s still early in the earnings cycle, but small- and mid-cap buying of fundamentally strong stocks in weaker sectors tells me that the value hunters are here. Are investors starting to pick through the ashes to see what gems lie beneath? Are investors pricing in a “red wave” in next week’s mid-term elections? It’s anyone’s guess at this point, but one thing is clear: Energy has been the place to be this year, with recent pockets of buying quality stocks in other beaten-down sectors. Selling is vanishing. The big lift might already be underway.
As Warren Buffet said: “Price is what you pay, value is what you get.”
Navellier & Associates owns Amazon.Com Inc. (AMZN), and Meta Platforms (META) in managed accounts. Jason Bodner does not own Amazon.Com Inc. (AMZN), or Meta Platforms (META), personally.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Recent GDP “Growth” Is Mostly SPR Oil Exports – A Campaign Ploy
Income Mail by Bryan Perry
A Rally That Seems to Defy Logic Faces Its Biggest Test
Growth Mail by Gary Alexander
Welcome to November – a Month for Thanksgiving
Global Mail by Ivan Martchev
Bonds Still Hold the Keys to the Rebound
Sector Spotlight by Jason Bodner
How Do We Value Beaten-Down Stocks?
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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