by Jason Bodner

November 3, 2020

I took my family to the Florida Keys last summer. In Key West, there is this cool Mel Fisher Museum. Fisher was born in Indiana and as a kid developed a bug for treasure hunting. After being a chicken farmer for a while, he went off the deep end and devoted the rest of his life to finding shipwrecks. He sought out some investors and tried for literally decades to find wrecked ships off the coast of Florida. He endured decades of struggle and failure. He even lost his son and daughter-in-law in a boating accident while treasure hunting, but he kept going through it all with his daily mantra: “Today’s the Day!”

Finally, July 20, 1985 was The Day. He and his team found the ruins of the Spanish galleon, Nuestra Señora de Atocha, the motherlode that yielded an estimated $450 million of treasure, including 40 tons of gold and silver. There were gold coins, Colombian emeralds, gold and silver artifacts, and piles of silver coins, including some 114,000 Spanish silver coins known as “pieces of eight” and 1000 silver ingots.

Then came the lawyers. First in line was the state of Florida, which wanted 25%. Then came the lawsuits, but after eight years of litigation the U.S. Supreme Court ruled in favor of Fisher. He could keep it all.

Mel Fisher Family Image

The ingots or bars of gold, silver, and copper served an additional purpose for old galleons. They acted as ballast. These days ballast is often seawater – far less valuable. But the concept of ballast is particularly interesting right now. Ballast acts as a counterweight to secure the boat against lateral movements. If a big wind comes along and there’s nothing to weigh down the boat, it’ll tip over quite easily. Add tons of treasure and your boat can stand firm in the face of high winds and waves – well, most of them anyway.

Sailing Ballast Image

My decades as a student of the market have led me to realize that the stock market is a bit like a sailboat. It has a path to follow and an ultimate destination. The last century of stock prices suggests that the ultimate destination is UP, but to get there, it endures countless setbacks, course changes, and all sorts of storms.

The market itself needs ballast. It needs insulation from volatility. I have found that the market’s ballast has lately come from Big Money: Big money managers include pension funds, hedge funds, sovereign wealth funds, and other large concentrations of money. These huge money pools, when deployed into the market, act as ballast. When markets are trending up and there is conviction about the future, markets are less volatile, but when storms hit, Big Money buying means the boat doesn’t rock so wildly.

When there is uncertainty, like now, Big Money players take risk off the table. They do this because they have great responsibility. Imagine you are managing billions of dollars. If you didn’t feel confident about the investing environment, you wouldn’t take risk; you’d wait it out. When that happens, markets can fall.

Our Big Money Index (BMI) measures net buying and selling by large investors over a 25-day moving average. When it rises, there’s more buying; and when it sinks, there’s more selling. Selling is a clear sign of risk reduction by Big Money investors. We can see here that Big Money has been selling since June…

MapSignals Big Money Index Chart

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

This selling is consistent with our analysis of election years. Even though we might favor one candidate to win November 3rd, no one really has any way of knowing what the outcome will be until all the votes are counted. So, consistent with all the elections we’ve measured since 1992, we have seen Big Money sell ahead of elections and buy afterwards. I expect the same pattern now, and it’s playing out that way.

That said, when Big Money reduces their investment in the market, it’s like someone taking the ballast out of the boat. Suddenly, any slight breeze can shake the boat violently. By contrast, a few months before (when Big Money was buying), if there was weight in the hull, you wouldn’t even notice the wind.

This is what I think is happening now. When big volumes of Big Money go away, the buy-sell spreads on stocks get wider, and there’s typically less volume on each stock. When this happens, high frequency and algo traders can come into the market by testing liquidity. If they sell and there’s Big Money there to buy, their sell order gets gobbled up instantly. The algos will then cover their short and reverse to buy stocks.

But if they sell short and then sell lower to hit weak, small-volume bids, then the algos “know” they can keep selling and push down prices drastically. Volatility spikes, and prices sag. This can intensify when there is less Big Money buying. Things can get ugly quickly, like a flimsy boat with no ballast in a storm.

We saw this clearly in last Wednesday’s sell-off, when correlation was high – near 1, meaning everything went down, not just some sectors going down when others go up. Utilities were the only stocks that barely stayed above water. Selling was deep in Energy, Real Estate, Communications, and Industrials.

MapSignals Sector Rankings Table

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

When Big Money is out of the market, it can get rocky quickly. This, along with an acceleration of earnings announcements and an election, is why we expected increased volatility. It’s here and it’s rampant.

I believe that once the election outcome is known and the country has a clearer picture of its direction over the next four years, volatility should ultimately die down. I anticipate that within weeks after the election there will be a COVID vaccine announced. Slowly but surely, the big picture uncertainty will be resolved, making way for more relevant uncertainties, like whether or a not a certain company will miss its earnings or sales estimates by a few percentage points – or what the Kardashians have to say.

But now it’s choppy. There was a medieval Latin phrase, dum felis dormit, mus gaudet et exsi litantro. The literal translation would be: “When the cat sleeps, the mouse leaves its hole, rejoicing,” but we have come to translate it as a rhyming couplet, “When the cat’s away, the mice will play.”

But there’s always the danger that the cat will come back sooner than expected.

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

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The U.S. Dollar Is Getting Ready to Move Up

Sector Spotlight by Jason Bodner
Big Money Provides Ballast During Market Storms

View Full Archive
Read Past Issues Here

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

Important Disclosures:

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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