by Jason Bodner
November 8, 2022
I used to walk past Bernie Madoff’s apartment on my way to work. In December of 2008, the mood in New York City was about as low as it gets. The day the news broke of his fraud, I walked past the building and saw a dog relieving himself on the corner of it. He looked perfectly happy and completely unaware of the irony of the moment. But I remember thinking to myself: Lucky Dog! He has no clue what’s going on. He woke up like any other day, blissfully unaware. It struck me that we are the only species that can create anxiety for ourselves. We created money, and the joy and misery that goes with it.
The level of fear seems higher now than during parts of the pandemic years. For much of 2022, we worried about recession and inflation. Now there are whispers of mass layoffs coming and very tight times ahead. Fed Chair Jerome Powell essentially verified this last Wednesday. The Fed statement was hopeful, but his press conference came as a splash of cold water. The Dow went from +415 at 2:34 pm to -275 at 2:52pm – down 690 points (-2.1%) in 18 minutes, as he talked; such is Mr. Powell’s power to pop bubbles. His stark wake-up call was yin and yang. Even though the central bank was eyeing slowing the pace of increases, he said it’s premature to know when it will end. This cratered stocks on Wednesday.
The NASDAQ tracking ETF (QQQ) lost 7.4% since Friday October 28th. Despite observing a near-term bottom in mid-October, volatility is still here. However, unusual sell signals did not spike significantly, and so the Big Money Index (BMI) didn’t fall… it is still rising from oversold since October 24th.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Here, we see that stock selling (below left) ticked up mildly but is still only 25% of the late September extremes. We also see that ETFs (below right) saw no jump in selling on the news:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
But like our happy dog, peeing on Bernie Madoff’s sidewalk, some sectors are blissfully unaware of the pressure that others are enduring. Energy remains the top-ranked sector, because it has the strongest sales and earnings growth. Yet traditional growth stocks are in pain. Tech and discretionary are bottom feeders.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, if we look at recent buying, it’s been in small and mid-caps:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
And when observing how sector buying and selling was distributed last week, we clearly see a continued big rotation. Energy, Financials, and Health Care are getting bought, while mainly Tech is getting sold:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We can plainly see that dispersion of energy and tech since the beginning of the year:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now that small caps are bid, and tech is on sale, we see the mega-cap tech trade continues to crumble. Last week, we saw continued sells on tech giants Microsoft, Amazon, Alphabet (Google), and Meta (I own Alphabet). All are making fresh lows on volume. Yet small- cap tech is getting bought in small amounts. Last week, Tech saw 76 sells and only 18 buys through Thursday.
Compare this with energy, which saw 61 buy signals and zero sells.
Now we get to the heart of the situation: The once seemingly unstoppable giant tech trade is unwinding. It will continue to unwind because children aren’t ducks, and vice versa. Let me explain. Correlation is when things move together, like when a mama duck waddles, and her baby ducks follow. Dispersion is when they tend to move opposite, like when a schoolteacher tries to herd kids back from the playground.
I looked at the NASDAQ to see what the stock returns inside were doing vs. the index. I wanted to see the level of correlation or dispersion of their individual returns vs. the mean. The reason is: High correlation returns mean passive investing is wise. Dispersion means you need people who can find alpha for you.
In a quick look at NASDAQ from 2011-2021, 76% of the stock returns fell within one standard deviation, so passive investing in a tracking fund would get you where you wanted to go. But in 2022, only 9% of stocks in the NASDAQ fell within 1 standard deviation, with low correlation of returns vs. the mean.
Put another way: 91% of stock returns this year are highly volatile. When looking at returns vs. the mean, NASDAQ is the teacher, and stocks are children scurrying everywhere with impunity… low correlation.
Don’t be confused with correlation of the stock’s movement. When stocks go down, they are correlated highly, as they all move together. Here, I am talking about returns.
For years, Big Tech drove indexes higher. But there are a lot of passive investors out there. They had to buy the index to meet their mandate. So, the higher the index went, the more giant tech they bought. And it became so imbalanced, that the five biggest tech stocks lifted the entire NASDAQ index in 2021.
This chart shows that if you removed those five mega-stocks, the index would have been deeply negative:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
What goes up must come down: As mega tech gets sold, indexers must sell… which means they get sold more. Vice versa when energy was under 4% of the S&P 500 in 2020:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
But now energy has nearly doubled in weight and is continuing to rise. And just so you know, we could go much higher. Here we see energy weight rose as high as 14% in 2009:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In conclusion, many of us choose to hurt our own peace of mind by dwelling on the negative when we could profit from the current state of affairs. As investors, the best sales and earnings growth is in energy with a natural tailwind. Tech, however, has a natural headwind and likely has some further reckoning in store. But all this is temporary. Tech will prevail in the long run, as we rely on tech more and more to progress as a society. For now, though, the trend is up for energy and down for tech… until it isn’t.
In the words of master trader Ed Seykota: “The trend is your friend, except at the end, where it bends.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Four Big Events in a “November to Remember”
Income Mail by Bryan Perry
The Fed’s “Terminal Rate” May Be Coming Soon
Growth Mail by Gary Alexander
“The End of the World” is a Popular Theme – But Wrong
Global Mail by Ivan Martchev
The Fed’s Epic Bait and Switch
Sector Spotlight by Jason Bodner
Is Carefree Investing Possible in This “Age of Anxiety”?
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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