by Jason Bodner
November 12, 2024
It’s finally over.
On the one hand, I am obviously talking about the election – it was hotly debated down to the wire, but like him or hate him, Trump won decisively. George Washington won every vote. We’ll never have another president voted in unanimously. That honor is now retired, going to our first president alone.
On the other (a bit less obvious) hand, I am talking about the end of uncertainty. A decisive election allows everyone to move on, if they can. I’m not into politics; I’m into data and investing. As an investor, all one hopes for is a decisive election. That’s what we got, and the market loved it.
The Big Money Index (BMI) is still the best metric for revealing unusually large money flows in the stock market. In October, the BMI became overbought then dropped out of being overbought after only four days. As the election tightened, investors sidestepped risk, moving money out of stocks. Then, after election day (the orange vertical line), money gushed back into stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I told you this was likely, before the election, as this has been the pattern for every election since 1992:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, with a clearer horizon, investors wasted no time placing their bets. In fact, the day after the election was the largest single day of unusually large buying since December of 2023 (left chart). ETFs also saw immense buying, equaling the huge buying spike in July, eclipsed only by December 2023 (right chart).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This buying decisively blasted stocks to new highs. In order to make a buy signal, stocks have to trade at new interim highs on unusually large volume. The amber lines below show stock trading on abnormally high volume alone without respect to highs or lows. You can see the big day of buying was major money moving in, also the highest since December last year:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
If you have been following me, you’ll know that I have been pounding the table for small- and mid-cap stocks since early last summer. I said that, regardless of which candidate wins, these groups would benefit. But should Trump win, that’s especially good for these stocks. Sure enough, when we look at the distribution of buying since November 1st, we see 86% of stocks bought unusually, were small and mid-cap companies. This launched the Russell 2000 (IWM) into the stratosphere last week:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Out of 490 stocks that were gobbled up in an unusually large way last Wednesday, November 6th, a whopping 138 (28%) of them were financial stocks. In this chart of XLF, we can see that since October of 2023, XLF was looking to break out of a range. In January this year, it took off and never looked back:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
On November 6th, the financial ETF (XLF) blasted to all-time highs on immense buying. This helped solidify Financials as the top-ranked sector. We see that in the sector charts, below: Financials clearly had the most unusual buying, while Technology, Industrials, Discretionary, and Energy stocks also saw unusual buying, breaking new high counts set within the last six months.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Materials, Staples, Communications, and Health care sectors also saw meaningful buying, albeit without seeing new high counts. Only Utilities and Real Estate failed to see meaningful buying, but there’s a good explanation for that. Both sectors just recently retreated from highs as they vaulted with imminent rate cuts. As both pay hefty dividends, they are more in demand when rates fall.
So, now what?
For me, the playbook is always the same. I look for the highest quality stocks among those that are seeing unusually larger inflows. Last week, that pool just got bigger, making my job easier.
It’s paradoxical to find great stocks in a bad tape. On the one hand, the selection pool goes way down, but on the other hand the real leaders have trouble hiding in mediocrity. Vice versa, a strong market can make all stocks look good when they all aren’t. So suddenly, we have a lot more stocks rising, but not all have what it takes to make it into my pool of buy candidates.
When selecting my pool of candidates, I focus on using identifying stocks with soaring fundamentals, technicals and money flows. First, let me summarize some of what I look for in the fundamentals:
- Double-digit percent growth in sales and earnings over 1 and 3 years
- Double-digit percentages of profit margin
- Low debt-to-equity ratio (usually 25% or less)
- Strong forecasted sales and earnings growth
- Expanding profit margins
And here’s some of what I like to see in terms of technical strength:
- Stocks breaking new 11-week highs
- Stocks at 52- week highs
- Stocks at all-time highs
- Volume rising with price
Last, but not least, a magical trifecta comes when we get unusually large buy signals on one or more of these superior stocks. That indicates heavy accumulation of a stock. And, given that between 70% and 90% of all daily volume is institutional, according to J.P. Morgan and Morgan Stanley, we want to pay special attention when they are competing to buy the best stocks.
That stunningly simple formula has allowed me to amass a batting average of about 70% of my selections rising over time. The winners are bigger than the losers, so the aggregate outperforms the S&P 500 by 7-1 in one model portfolio strategy since 1990.
I know – it’s more fun to pick stocks when they ALL go up, but that is not realistic.
The good news is that we have a lot more candidates to look at now, as traders think a Trump presidency is good for small- and mid-sized businesses. If you add in falling interest rates removing some headwinds from capital- or borrow-intensive businesses, and we add more fuel to the fire.
I know that this election has made many people happy and many others unhappy. This election was never going to make all America happy, so I choose to focus on things I can control. I can control what stocks go into my portfolio. I suggest you do the same: Focus on how to position your investments to benefit from next year’s market realities, regardless of your feelings on the election results.
“What separates the winners from the losers is how a person reacts to each new twist of fate.”
–– Donald Trump on Twitter, December 2014, six months before announcing his first run for office.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Did We Just See the Fed’s Final Rate Cut?
Income Mail by Bryan Perry
A Compelling Case for Convertible Debt
Growth Mail by Gary Alexander
The Market Implications of a Republican Sweep
Global Mail by Ivan Martchev
What the Post-Election Collapse in Volatility Means
Sector Spotlight by Jason Bodner
We Got the Decisive Election the Market Craved
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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