by Jason Bodner

December 22, 2020

Last week, I took you through 2020 through the BMI lens. Now, let’s put two lenses on.

Bear in mind that the BMI does not respond to the news headlines. It is not concerned with the headlines, but the following chart will plot the news headlines above the BMI for reference purposes:

Big Money Index with News Headlines Chart

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

The first thing we notice is that the news is a less reliable indicator of forward market prices than the BMI. I’d argue that as the news gets positive, market peaks are near. And when it gets pessimistic, market troughs are near. Either way, my analysis shows me a clear truth: Big Money investors don’t trade on the news; more often they trade before the news.

Next, after looking at 2020 through the lens of news and Big Money, let’s examine the outlier process, which I mentioned last week. This is the process of how Big Money finds and buys the best stocks.

My research firm has audited over 30 years of live and back-tested data. This process has identified an average of over half the top 5% of the best-performing stocks of the S&P 500 index each year. That’s an average 13 of the top 25 performing stocks of the S&P 500 each year. Moreover, it found them early, often before they began rocketing higher.

So how did this process work in a very unusual year – like 2020?

Among 2020’s top 25 performing S&P 500 as of December 10, my process found 16 of them (64%) early in their cycle, nabbing nearly half of their moves for an average return of +41%.

The average 2020 return of all S&P 500 stocks (as of that date) was +8.94%. Removing the top 25, the remaining 475 stocks average was +4.98%, cutting returns by 44%! And a shocking 40% (195 stocks) of the S&P 500 stocks were negative for the year through December 10 in 2020.

The message is clear: Holding outliers means everything. If you miss them, you can expect average returns at best. In 2020, if you didn’t hold the top 5% of stocks, your return got cut nearly in half.

Looking Forward to 2021

Below the surface, the year 2020 was a calamity in many ways. So, where do we go next?

I’m not a crystal ball guy, but I love data, so I can make some predictions fairly confidently.

Some predictions for 2021:

  • The markets will keep rising throughout 2021.
  • Retail investors will buy stocks in January in a big way, but that’s likely the time to lighten risk.
  • 2021 earnings year-on-year comps will be epic. Q2 and Q3 will likely be the best earnings and revenue growth of my lifetime (and I am fairly young).
  • Growth stocks will get their groove back. The rotation into value will continue, but more muted.
  • Outlier stocks will continue to hit new highs.
  • There will be one oversold period for stocks in 2021: an opportunity to buy phenomenal companies at great discounts. Isolate prior outliers unfairly punished from overreactive markets.
  • You’ll see more bombastic headlines. Many will seem designed to shake investors out of stocks. News sells advertising by getting people afraid because they focus on negativity. But we tend to buy great stocks on news-driven pullbacks.
  • The “reopen” play continues for a while. But this will be speculative as these sectors have yet to actually benefit from boosting revenues for a yet to happen reopen! When a pullback comes, I anticipate momentum sectors getting a reality check. A value/small-cap pullback will be exaggerated too: Algo and HFT will seize on the reversal of momentum, driving the Russell 2000 ~+12.5% since November 9th vaccine news. When this happens, capital should flow back into tech growth stocks. But, when value/small-cap stocks start to beat 2021 expectations, they will get another capital inflow.
  • I’ll try to identify more than half of the S&P 500’s top 25 performing stocks in 2021, and early.
  • As usual, more market twists and turns will punish ordinary investors who will suffer from panic and overconfidence.
  • 2021 will improve from 2020! We will be healthier. A vaccine will roll out, and a return to life as normal is very much visible on the horizon.
  • 2021 will provide just as many phenomenal investment opportunities as years past, although opportunity rarely feels like opportunity. The March lows for stocks were also a high for despair. Money managers were openly crying on TV. People were dying along with the economy. That did not feel like an opportunity; it felt dreadful. But it was a prime historical buying opportunity.

There you go. We look back and forward through different lenses. When looking at stocks, I only see them through Big Money glasses. They buy before big market moves. They know which stocks to buy, sell, and when to trade. Everyday investors can’t compete unless there’s a window into Big Money.

That’s how I see the world. My lenses worked in 2020 – a very tough year – and they will work in 2021.

When I was a kid, I walked into walls because I couldn’t see. A different lens was all that was required.

When I started trading stocks, I got my hat handed to me. A different lens was all that was required. That Big Money lens has made all the difference. And it will for next year, and the years to come.

“Human beings can only make sense of the world through the lens they were socialized to make sense of it through.”

-Robin DiAngelo

When will this stock market crack?

Popeye had legendary super strength from eating spinach. Ironically, the concept of strength from spinach was based on flawed data. In 1870, while researching the nutritional benefits of spinach, chemist Erich von Wolf misplaced a decimal point for the iron content of spinach in his notes: 35mg instead of 3.5mg.

Ah yes, the devil is in the details, but some cartoonist ran with the 35mg, and the rest is history.

The thought of combing through a monstrous spreadsheet of thousands of numbers makes most people queasy, but I find it soothing. There is plain truth in numbers, while listening to media opinions just doesn’t give me that same quality of black-and-white accuracy.

So I dug through my data for hours to answer this burning question: When will this stock market crack? 

I am an eternal optimist and a perennial bull, but ultimately I’m a slave to my data. At my research firm, we scan 5500 stocks a day and then rank each one for health (things like earnings, sales, and profits) and mechanics (things like new highs, lows, or how strongly a stock is trading). Once ranked, we overlay a special algorithm designed to identify when Big Money is moving in and out of stocks.

Our computer spits out buy and sell signals on stocks that are seeing “Big Money” in- and out-flows. We then take all buy and sell signals and plot them on a 25-day moving average, to get the Big Money Index (BMI). We then pick stocks based on when Big Money is buying and what they buy, the best stocks.

Here’s how the BMI worked last year and where we are now:

MapSignals Big Money Index Chart

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

When the yellow line drops below green, the market is oversold, and we can expect a near term big bounce. When the yellow line is above the red line, the market is overbought, and we can expect a near-term pullback. That’s where we are now – above the red line – so the stock market is heavily overbought.

So when will it crack?

My data goes back to January 1st 1990 – nearly 31 years, or over 7,800 trading days. Each day has a BMI reading. The BMI Index has been highly accurate for identifying market tops and bottoms since 1990. It  allowed me to alert you last January that a market top was near. It also led me to call a market bottom for March 20th (off by one day) and led me to bet on America and buy stocks in late March and early April.

What does the data say is next for the market? I’ve done all the hard work and number crunching for you.

What’s important to know is that the Big Money Index can stay overbought for a long time. It stayed overbought for nearly four months this year, from May 6th until September 2nd.

The key is to mark when the BMI peaks in overbought territory; that’s when we need to pay attention. It often drifts lower as Big Money buying disappears and selling increases. The stock market indexes often continue to rise for some time thereafter. When the BMI peaks is usually a good time to reduce risk, take profits, and save cash to go shopping when markets come under pressure.

So let’s put all the data together:

  • There have been 52 overbought periods of the BMI since 1/1/1990.
  • The average length of each overbought period is 43 calendar days or about six weeks.
  • The Big Money Index peaks an average 19 days (just short of three weeks) after the market initially goes overbought.
  • The S&P 500 rose an average of +1.7% in that time.
  • The S&P 500 index peaks an average 46 days after the market initially goes overbought. That means stocks can rise another four weeks after the BMI peaks!
  • The S&P 500 rose an average 4.3% from initial overbought to the S&P 500 peak. That’s when to be cautious and get ready for the inevitable pending drop.
  • Once that drop begins, the market peak to trough takes an average of 91 days, or three months.
  • The S&P 500 fell an average of -8.9% during those peak-to-trough drops.

After seeing what history tells us, we can forecast average dates and levels for the next few months:

Average Dates and Levels Forecast Table

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

In a more readable fashion, and in chronological order:

19 days from overbought to BMI peak on Monday, December 21, 2020 (i.e., right now)
46 days from overbought to index peak on Monday, January 18, 2021 (i.e., just before Inauguration)
91 days from index peak to trough on April 19, 2021 (i.e., Day 90 of President Biden’s first 100 Days)

If you’re skeptical, remember that I used this same technique when I called a market bottom for Friday March 20th of 2020. I was off by just one day as the S&P 500 bottomed on Monday March 23rd. So I will boldly make the following predictions based on my 30 years of data crunching by setting these dates:

  • The market went overbought on December 2nd.
  • The Big Money Index peaks Monday December 21st at S&P 3731.56 (I’m writing on Friday)
  • The market will remain overbought until January 13th, 2021
  • The S&P 500 will peak on January 18, 2021 at a level of 3828.50.
  • The S&P 500 will then fall until Monday April 19th when it will trough at 3341.81, down 12.7%.

Those are very precise figures, but they are all based on the averages of decades of data. Time will tell if I will prove to be right, but one thing is for sure – history suggests that a market peak is near.

Either way, I’ll keep you informed with any changes I see in the data.

Big Money can show us the way forward. It can let us know when to keep our chips on the table, and when to take some chips off. Data may have been boring in school, but now it is our secret weapon for navigating these difficult markets. Where some see a sea of unrelated numbers… I see a market map.

And I’ll be keeping a close eye on it…

“All you need is the plan, the road map, and the courage to press on to your destination.”

–Earl Nightingale

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

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Global Mail is on Hiatus

Sector Spotlight by Jason Bodner
2020 in Review & My 2021 Preview (Part 2 of 2)

View Full Archive
Read Past Issues Here

About The Author

Jason Bodner

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

Important Disclosures:

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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