by Jason Bodner

December 21, 2021

Investing is full of data, like prices, volume, interest rates, returns, volatility numbers, and on and on…

But perhaps it’s even more full of emotion. We humans worry about everything, innately fretting over things we can’t control. But outside factors can actually help calm us down, without us even knowing.

For instance, in 2003, the London Underground started playing classical music in tube stations. The idea was to deter anti-social behavior. The result? Train robberies dropped 33%, verbal assaults on staff fell by 25%, and vandalism decreased 37% over 18 months.

With market volatility rising, maybe we should play a little Mozart in some leading brokerage offices.

“What volatility?” you may ask… “Despite a few choppy days, the S&P 500 is near all-time highs!”

You’d be right. Here we see two charts of SPY (S&P 500 tracking ETF). The first overlays the Big Money Index, a 25-day moving average of all unusually large stock buying and selling. It’s a money flows meter. When it rises, money is rushing into stocks. When is falls, money is gushing out.

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

Money is clearly coming out of stocks. We see similar trends with individual daily stock buys and sells:

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

This shows that, despite money coming out, SPY is only 2% below its recent highs.

Nothing to worry about, right? Well let’s look at that through a different lens: Small-caps. Below we see the same charts but looking at IWM (the Russell 2000 Index tracking ETF). It looks quite different:

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

By contrast, IWM is 11% below its peak, experiencing a much deeper drawdown. Why might that be?

You may remember me explaining this in the past, but the S&P 500 is significantly propped up by the value of just five stocks. We see the same in the NASDAQ index. The year-to-date performance of the NASDAQ is dominated by five stocks and would be deeply negative without these five largest stocks:

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

Accounting for the disparity between these large caps (five stocks) and small caps, the truth emerges.

So now what? Naturally we can talk about anxieties that rattle markets. There are potential rate hikes next year, tapering, inflation, Omicron, lockdowns, the Turkish currency crisis, and I could go on all day.

This headline cycle is no different than any other time. Of course, each day’s challenges are unique. But there will always be bad news. Always. And bad news sells better than good news.

That’s why I prefer data – specifically big money data. As we saw already, big money is reducing risk, even if it’s not visible in the SPY yet. We also see more rotation in the “washing machine” market cycle.

Last week included “option expiry” days, which always juice volumes. But, looking below the surface, we see money moving in and out all over the place. The yellow numbers (below) denote when a sector sees 25% or more of the observable sector universe with unusual buying or selling (source: MAPsignals).

Basically, yellow in the SELL column is a yellow flag: pay attention; there’s some big activity going on!

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

Warnings came in Tech, Financials, Energy, Industrials, Discretionary, and Communications, which got sold. Real Estate, Utilities, and Healthcare got bought, and Staples got both bought and sold in a big way!

This rotational action just amplifies the frustration and confusion. The Fed essentially came out and said: Expect rate hikes next year. So, we saw buying in rate-sensitive stocks like Real Estate and Utilities…

Okay, I get it…. But banks, which should benefit from future rate hikes, got sold. Growth stocks have felt pain significantly for a month now. They finally saw a small bounce, but still have much ground to cover.

Interestingly, of those five largest stocks, only one really pulled back substantially: Tesla (TSLA). The others have slipped some, but are still powerhouses:

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

Navellier & Associates owns Nvidia Corp. (NVDA), Apple Computer (APPL), Alphabet Inc. Class C (GOOG), Microsoft (MSFT), and 1 clients owns Tesla (TSLA), per client request in managed accounts. Jason Bodner does not own Tesla (TSLA), Nvidia Corp. (NVDA), Apple Computer (APPL), Alphabet Inc. Class C (GOOG), or Microsoft (MSFT), personally.

This says to me that there is pressure in tech and small caps, and only the large caps remain afloat. And of those, only a few are “oases of quality.” If they crack, we might see a full-fledged correction.

The argument against this is that NASDAQ successfully retested its lows on Friday, meaning it didn’t break lower yet. But given the weak technical action we’ve seen so far, and when we factor in the BMI and stock selling, odds of weaker stock market prices near-term seem to outweigh odds of new highs.

That said, I am not bearish on stocks. All markets need to correct and reset. Its healthy and necessary for a normal functioning market. Should that happen, we need to be ready to buy terrific stocks at discounted prices. We will know when that BMI drops below 25% into deeply oversold territory. We’re not there yet, but even if we don’t see another buy signal, we still won’t reach oversold for eight trading days from now – which means after the New Year begins, based on the how the BMI works.

Either way – be ready! Even if the BMI doesn’t go oversold, at least you are working on a stock buy list.

One last thing, we’re working on a near-term Oversold Stock Index. The idea is to look only at stock selling, so we can identify near-term oversold conditions ripe for a bounce. It’s early but initial results look promising. We’re looking at days where there are 150 stock sells or more. Those are the yellow dots:

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

Let’s look all the way back to 2015:

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

While the BMI shows us deeply oversold times, they are rare, happening maybe once a year, but this index will show us quicker reversion points. Keep an eye out for more details, but the takeaway for right now is this: The last yellow dot we saw was Friday, December 3rd.

As markets churn, stomachs may churn, too. But remember – that’s our own doing. We stress about everything. Maybe with some calmer music, we’d chill out: Remember: “Remain calm, serene, always in command of yourself. You will then find out how easy it is to get along.” — Paramahansa Yogananda

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

Please see important disclosures below.

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We’re Near “Oversold,” Ready for a Santa Claus Rally

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Read Past Issues Here

About The Author

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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