by Jason Bodner
November 7, 2023
Storms come and sometimes bring hail. But storms can bring much better things – as on Jupiter or Saturn, where it likely rains diamonds. The latest media storm may also bring us some diamonds in the rough…
The recent news cycle has been predictably dreadful. With the ongoing Ukraine war, a new war in Israel against Hamas, inflation fears, the UAW auto strike, high yields, and recession fears, to name just a few stories, it makes me wonder: If aliens came down to visit, they might think we are chronically depressed and actually enjoy being negative. But this is the job of the media – since bad news sells like hotcakes.
I am here to tell you that there is reason to be cheerful, after all. I’ve been telling you that the stock market was supposed to rise in October, historically speaking, but clearly, most traders did not get the memo, as it was a dismal and spooky month, so now, there is some good news to get behind.
First, let me address some of the flurry of headlines and stiff headwinds holding back stocks. Then we will look at some of the data buried in the technicals and fundamentals of stocks that has me encouraged.
Last week brought some pretty big news. First, there were big worries over a normally little-heralded calendar item, previously reserved for finance nerds: a Treasury refunding announcement. But, relieving news broke Wednesday. The refinancing tab of $1.12 trillion came in below estimates of $1.14 trillion, a baby step in the right direction. This helped Treasury yields start to back-off their recent highs.
Further relieving those high yields was the FOMC meeting. It was a near certainty that the Fed would hold their target rate steady, which they did, at 5.25-5.50%. While this is still a multi-decade high, the announced second straight pause was a firm indication they are done. I anticipate rates falling in 2024 as early as the first quarter. The FOMC statement and Powell’s Q&A offered clues to back up this scenario.
Sure, there was also plenty of tough talk reiterating a commitment to the long-term goal of inflation at 2%, but I’d like to repeat the historical fact that, since 1960, the CPI data shows 2% is a bit of an outlier, as the average CPI rate for the last 63 years is 3.77%, which sits slightly above our latest reading of 3.7%.
I’ll also remind you that the normal relationship with interest rates lower than inflation is heavily inverted right now, which historically does not last long:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
There was also plenty of dovish language in the latest FOMC statement, which is catnip to this paranoid market. Powell indicated that long-term rates were doing some of the Fed’s job – by tightening financial conditions, for instance. He also admitted that inflation is cooling. A key point in the Q&A, for me, was when Powell admitted that the FOMC committee removed recession from the model predictions and did not put it back in. That’s BIG, considering the entire investment world has been waiting for an inevitable recession (since 2020), that just hasn’t come. That’s a pretty clear indication that doom isn’t in the cards.
Wall Street naturally rejoiced with two big headwinds removed – rate increases and recession – so we saw significant buying late last week, which is almost certainly comprised, at least somewhat, of short-covering. This is good because a short-covering rally can then spark a real rally. Let me remind you: There is still nearly $6 trillion in cash out there, according to the St. Louis Fed – the highest on record:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Naturally, that cash is earning respectable rates of income, for a change. But, if rates start to fall – which they certainly will, over time, you can expect a major flood of money crashing into stocks.
Back to how Wall Street reacted; we can see the latest money flows into stocks. The amber bars below show us unusual volumes surging as markets lifted higher the past two days:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is a strong indication of a bottom out and a reversal higher. We also see sellers slamming the brakes on stocks and ETFs:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This has also lifted the BMI from its lows of 17.4 to above 20. This implies the BMI can rise from oversold very soon:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, when we look at all eleven S&P 500 sectors, we see some encouraging signs as well. The previous violent, capitulation-like selling has suddenly vanished – for every sector.
Occasional pain-points still materialize, largely due to earnings disappointments, but for the most part we either see a relief from heavy selling, or even some small green shoots, indicating early buying:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
While I’m on the subject of earnings, according to FactSet, with 81% of S&P 500 companies reporting results, 82% reported a positive EPS surprise and 62% reported a positive revenue surprise. For Q3 2023, the blended (year-over-year) earnings growth rate for the S&P 500 is 3.7%. If the quarter finishes that way, it will mark the first quarter of year-over-year earnings growth reported by the index since Q3 2022.
This means earnings are still working, despite the dour expectations. Sure, some stocks are seeing very outsized negative moves, mostly due to weak guidance or earnings misses, but this looks a lot like forced liquidations, as some levered funds may be on the ropes. There are a few things to keep in mind, though:
- The BMI is still oversold. And based on the levels recently seen, the forward returns since 2016 are stellar, with returns since 1990 being strong as well:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
- We are in the midst of a historically strong seasonal time of the year:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
- The Fed has paused rates, and rate cuts are likely on the horizon sooner, as Treasury yields are falling fast. Look at the 10-year Treasury falling from nearly 5% to just over 4.5% in just a few days:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Markets are already reverting higher, faster, in the last week, after we got the initial news we wanted from the Fed and Treasury refunding. Earnings are working. Markets were deeply oversold. And possible fund liquidations wrapping up for October would line up nicely for timing as November, so far, has been stellar for stocks. It’s when fear is high that the best deals reveal themselves – they just feel terribly frightening.
Remember the anonymous quote: “It’s always darkest before dawn.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Downbeat October Jobs Report Does Not Even Include the UAW Strikers
Income Mail by Bryan Perry
2-4 Year Investment Grade Corporate Bonds Look Very Timely
Growth Mail by Gary Alexander
New Orleans Does It in Style – Once Again!
Global Mail by Ivan Martchev
We’re Seeing a Massive Short Squeeze in Both Stocks and Bonds
Sector Spotlight by Jason Bodner
The Latest Media Storm Is Raining “Diamonds in the Rough”
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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