by Jason Bodner
December 20, 2022
A signalman operates train signal systems, serving an important role in the railway industry. In South Africa in the 1880s, “Signalman Jack” worked nine years and never made a single mistake on the job. This may seem unremarkable, but Signalman Jack was a baboon. His owner lost his legs and needed help getting to work. He trained his baboon to eventually do his job. This freed him up to pursue hobbies.
Instead of firing him or the baboon, the railway made the monkey an official employee. His official salary was 20 cents per week and a bottle of beer.
If a baboon could successfully traffic people and cargo on a busy railway, perhaps we shouldn’t over- complicate the stock market. After all, it really isn’t that complex. The daily gyrations of stock prices are just an expression of all the human emotions wrapped up in buying and selling decisions, including fear and greed on any given day. Last week, there was a little of one (greed) and plenty of the other (fear).
In the news feed last week, things just seemed to get worse, and sentiment suffered an ugly dent. But that’s my emotional side speaking. I see the red price action of sinking stocks. I hear the cold, harsh words of the Fed Chair. I sense the negativity in other people’s attitudes towards our economic future.
All these things nudge me to succumb to the notion that maybe stocks won’t do that well in December after all. But then I remove my emotions and look at the task at hand. Maybe that’s why our baboon was so good at his job. He wasn’t worried about other people’s feelings, their fears, or their anxieties over what might or might not happen. He simply had a job to do, and he did it – flawlessly for nine years!
So, let’s be more like Signalman Jack. Let’s ditch our feelings and check out what the data tell us.
Starting from the top, the Big Money Index (BMI) is surging towards overbought territory. This simply means that big buyers are in control and there has been significantly more unusual buying than unusual selling in recent weeks. We can see the BMI is at its second highest level of the year, above 70%:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Looking at the three-month charts, we see a strong surge in the BMI accompanied by a steady rise in buying. The daily buys and sells of both stocks and ETFs are both solid and steady. Notice that the peaks and valleys of the SPY since mid-October line up nicely with stock buying waxing and waning.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The same can be seen for ETFs, only when ETF buying gets wildly intense, like late November, it historically signals near-term tops. This time was no exception. That’s nothing to fear; it just often notes that a pause in a market’s rise usually follows.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We can get a better sense of what takes place under the surface by looking at sectors, although one thing needs to be said before we get to that. If you’ve been following me, you know that since August, I have forecasted a sloppy September, a weak start to October followed by a lift in stocks through the end of the year. I also said that history suggested a stronger-than-average fourth quarter due to mid-term elections.
This has played out to a “T” so far, but not due to any gut instinct or guess work. I looked at over 30 years of data and historical averages to guide my thinking.
One final note on that… concerning mid-term election years: 10 of 10 mid-term years since 1980 saw a market rise from November 1 to the next April 30th with an average +12.6% gain on the S&P 500 during that six-month time period. We shall see if the streak continues, but history is on our side.
Next up, the sector rankings are tabulated below. Not much drastic change is happening. Energy still ranks #1 despite some pressure on the price of oil lately. Tech and discretionary remain near the bottom:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When digging deeper, what I see below is meaningful buying in nearly every sector. You can see it by looking at the blue bars on the right side of each chart.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As I write this (on Friday, December 16), we haven’t seen the kind of tremendous selling that one might associate with ugly market performances like Thursday, December 15. In fact, thus far, for the week, we have seen more buying than selling, and the buying continues to be focused in small and mid-cap stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Fed’s tone was hawkish enough to spook investors on Thursday, but was it hawkish enough to change the near-term trend? Only time will tell, but more importantly, the data will tell.
We need to wait to see what the data suggest in the next few days, but recent data make me less pessimistic. Down days for stocks have been below average on volume while up days have been above average volume. Even Thursday’s ugly sell-off was around the 3-month average volume by my metrics.
Powell’s job isn’t easy, but it is straightforward: Monitor the data and react accordingly in the Federal Reserve Board’s best collective judgment. Maybe that is easy, but I certainly wouldn’t want that job.
Maybe Signalman Jack would do better. I’m not suggesting a baboon could do Powell’s job. But it points out the inherent pressure of investors trying to be one step ahead of the game. The media makes us believe that we should already know what should happen tomorrow, and what the value of an entire stock market should be a couple of weeks from now. But if we were to take a Signalman Jack approach, we would just do our job as investors, day to day. Then, we follow a simple plan of pushing the right levers.
That brings us to the recipe that I follow, which is to identify stocks with superior fundamentals that are getting bought in an unusual way by the largest investors on planet earth, and invest in those over time.
In the words of Confucius: “Life is really simple, but we insist on making it complicated.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Inflation and Treasury Rates are Decreasing – But the Fed Seems Blind to Both
Income Mail by Bryan Perry
The Fed Is Right on Course to Overtighten
Growth Mail by Gary Alexander
My Top 10 “Better Business” Books for 2022
Global Mail by Ivan Martchev
The Bond Market Does Not Believe the Fed
Sector Spotlight by Jason Bodner
Invest Like Signalman Jack – Follow a Simple Playbook and Plan
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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