December 4, 2018

It’s been another exciting week, partially because it was my birthday. OK, what’s so cool about that? What’s cool about that is that the Earth keeps slinging around the Sun at 66,780 miles per hour, so that means the Earth has gone 584,337,600 miles around the Sun since my last birthday!

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

Aside from that, I watched the market work to repair itself. Many don’t trust this rally, but I saw some bullish action last week. First, the market closed higher than it opened every day last week. Even futures that were lower in premarket were bought up before the open. This is a sign of technical strengthening.

The big move in each index (above) obviously came on Wednesday, when Fed Chair Jerome Powell’s dovish comments were read to mean that future rate hikes will be limited, for now, at least in the market’s opinion. The market’s big rally also sparked short covering, which possibly ignited some “real” buying.

More on that in a moment. First, let’s check out the 1-week performance of the sectors – it’s pretty juicy!

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

The popular chopping-block sectors got major lifts. Consumer Discretionary, Information Technology, and Communications Services finally got some love. Staples, Real Estate, and Utilities were among the “least-good” performers last week. So, the growth sectors which had been under fire for the last few months found a bid, and the defensive sectors which had been a haven were less compelling last week. Even energy performed pretty well as Crude Oil may have found a floor at $50.

This type of sector performance is a bullish setup.

The Ratio of Buyers to Sellers Took a Big Leap Up Last Week

Most interesting to me is the unusual institutional buying and selling data that I look at. We’ve talked about selling needing to slow before we head higher. Well, selling is slowing. The ratio is also jumping, which happens when selling slows. This is very bullish – I expect a pop in a big way for the market.

For a quick recap on how the MAP-IT ratio works, it calculates a 25-day moving-average ratio of unusual buy signals over unusual sell signals in U.S. stocks. Out of 5,500 stocks, we see an average MAP-IT ratio of 63% over 1,615 trading days of data (since July 2012). Seeing an average signal above 50 makes sense in an up-trending market, which we’ve certainly seen since 2012. (The Russell 2000 ETF, for instance, is up 89% from July 2, 2012 to last Friday’s close.) More buying than selling on individual stocks means we would expect higher market prices. This has been a reliable assumption in these 6+ years of data.

When the ratio heads negative, we would expect to see lower market prices, at least short-term (see chart).

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

What’s the ratio telling us now?  The MAP-IT ratio gapping up tell us to expect higher prices. On October 24th it fell below 25% (the dip into the green territory), meaning oversold. We said then to expect a bounce, and it bounced. Then, we retested lows on lower volume – something we also said to expect.

During that retest the ratio actually crept up to the 28% range (above oversold). This was because lower volume meant fewer sell signals. Our ratio went up not because of buying, but because of less selling, as the selling was exhausting itself. Last week, our ratio popped up to near 36%. We are now starting to see buying signals. Because this is a 25-day moving average, I expect it to climb higher as days accumulate.

When can we expect to see the ratio in the 60’s again? We need time, because for a signal to fire in our model, we need to pierce through roughly 11-week highs or lows. This much time must roll off to allow our interim highs and lows to “reset.” (The latest S&P 500 at all-time highs came about 10 weeks ago.)

Our ratio is climbing because the selling is likely over, which is what everyone really wants to hear. The important thing to remember is that a ratio climbing out of oversold territory is very bullish for the overall market, according the MAP data. So, that’s another reason why I am bullish.

Lastly, we have the everyday “reasons” to be bullish. Wall Street is infatuated with reasons. People tend not to accept price action without a logical reason attached to it. I am comfortable accepting price action at first and finding the real reason later. However, the general public likes it this way: Prices change, and the media needs to provide answers because everyone wants answers. We might not know the real reason for weeks or months. Now is no different. I look at the data and announce in real time what I see.

For now, I’ll say that last week’s rally was helped by the dovish comments from the Fed chair. That removes one cloud looming overhead. The G-20 could also remove another major cloud in terms of trade-war progress with Presidents Trump and Xi. It also seems like there was a very real short-covering component last week. But does that spark “real buying”? I believe it does, and I think we will see the market climb in the coming weeks. In addition, the usual past-mentioned reasons I’ve listed still hold: Record sales and earnings, low taxes, stock buy-backs, and a strong dollar all remain wind at our backs.

Low energy prices may seem troublesome, but this is a double-edged sword. Cratering oil is an obvious negative for energy companies relying on higher oil prices to maintain profit margins. The flipside is with gas prices falling at the pump, consumers have more money for holiday shopping and personal spending.

Either way, the data says we are headed higher, and I trust the data. The negative sentiment is still out there, which is one more reason I am positive. Love him or loathe him, there is no denying Elon Musk’s forward-thinking nature and his positive attitude. He said: “I’d rather be optimistic and wrong than pessimistic and right.” The data says, “Be optimistic,” and the data tends to be right.

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*


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