by Jason Bodner
December 19, 2023
Good things come to those who wait. Cicadas can wait a long time. They wait 17 years in hibernation before emerging. We didn’t have to wait 17 years before a raging bull reared its head, even if it felt like it.
As I had been anticipating, the Big Money Index (BMI) has gone overbought, but that doesn’t mean you should sell your stocks because it doesn’t matter much when the BMI goes overbought; it matters when it falls from overbought. I’ll explain, but first, something about the BMI: pretext is context, meaning, what happened before, greatly impacts how the BMI behaves. That’s how it was designed. Allow me to explain:
The BMI is a proxy for unusual money flows. The BMI takes all unusual buying and selling of stocks and ETFs and plots them on a 25-day moving average. It’s a totally unique measure and unavailable anywhere else. It allows pinpointing market pivot points with stunning accuracy.
Let’s take recent events: the stock market quickly flipped from oversold to overbought. On November 3rd, the BMI was oversold and less than six weeks later, on December 14th, the BMI became overbought.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As rapid as that seems, it makes sense – especially after times of heavy turbulence. When markets become grossly oversold, the bears have control and there is usually no good news around. Liquidity is dry and volatility is high. That was October’s climate. It is important to acknowledge that October came on the heels of intense volatility in August and September. This is an important distinction. For three months – or more than 60 days – there was constant selling, reaching a fever pitch in late October.
One key component of an unusual buy or sell signal is that it violates a 55-day high or low on extreme volume. Three months of trading lines up nicely with that critical component of signal generation. When the switch finally flipped from selling to buying, those 55-day highs became easier and easier to achieve. That meant more and more buy signals could be generated each day – especially on rising volumes.
And that’s exactly what we saw:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
You can clearly see, in the charts above, the green buying bars launched in early November. Not only have they not stopped but they have intensified. And the latest data shows extreme buying.
This is corroborated from the chart of unusual trading (not necessarily up-trends of buying or downtrend selling – but just big trading). We can see that the latest push higher was on huge volume:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We haven’t seen buying like this since June 9th of 2020:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That 2020 buying spike directly prefaced a -6.8% drop in the SPY that took place over a few days, but for context, this buying peak was out of the depth of the COVID uncertainty and lock-down period.
The latest buying might indeed preview a market pullback. And given the speed and intensity of the rally, that would seem warranted, and natural. But before you get scared out of stocks, understand this:
The June 9, 2020, buying peak marked a 45% rally from the market’s ultimate COVID low on March 23, 2020. Let’s say you had exited stocks because the BMI went overbought on May 6, 2020. Then you would have missed out on a substantial +13% rally until the peak June buying. Now if you had exited stocks because of that peak June buying, you still would have been very early. That’s because from the June 9th green spike, the SPY still rallied another +52%!
Now, this is the key point I want you to take away – this is because the BMI can stay overbought for a long time – especially after deeply oversold conditions like October of this year.
Look at this chart of the BMI reflecting the post-COVID time period we just discussed. You can see the BMI stayed overbought for a shockingly long period of 87 trading days – almost exactly 4 months:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The takeaway here is to watch for when the BMI falls from 80% (overbought). This buying could sustain itself for a while because the world got the closest equivalent to the Fed flashing a “green light” (which they sort of did). In its latest announcement, the Fed announced that rate cuts are coming in 2024 and 2025. They telegraphed six cuts, with the dot-plots indicating rates falling by 0.75% in 2024 alone.
I believe rate cuts will come sooner than later. The first reason is that the Fed target rate of 5.25-5.50% is wildly higher than both the CPI (3.1%) and the 10-year bond (3.93%). This can’t last. And let’s not forget that inflation is falling along with market rates. The Fed does not like to fight against the market grain.
This is the conformation that the investing world has been waiting for, and it’s evidenced by the recent action. Recent buying has been happening in all sectors (except energy), as seen here:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
And here is how the sector strengths look. Notice how growth sectors are at the top of the list:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Lastly, we’ve seen huge buying since November 1st in growth-heavy small and mid-cap stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Recession may or may not come. It’s almost sad that there are still so many pundits calling for a recession with so little evidence. There has been a call for a major recession for three years running, and it just hasn’t come. And now rates are poised to fall for the next two years. Folks, I believe this is the beginning of the cash bubble popping… a cash bubble that has swelled to an astonishing 6.14 trillion dollars!
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
There may be a short-term (much warranted) pullback, but history indicates that if you sell, you could miss big gains. I believe the winds are finally at our backs. A century of history tells us to bet on stocks.
“History is a guide to navigation in perilous times. History is who we are and why we are the way we are.”
–Historian David McCullough
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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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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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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