by Jason Bodner
December 5, 2023
The good news about forest fires is that they bring forth all sorts of new life sprouting from the ashes of the forest floor. As natural as forest fires may seem, the Insurance Information Institute tells us that human beings cause about 85% of all forest fires in the United States.
That’s a big number, but I’d say that about 100% of all stock market “fires” are caused by humans. And just like a forest, new life springs out of the market’s ashes. Well, August through October was another market “fire,” and we just closed another November that sprouted new market life. November of 2023 marked the third strongest November since 1980. The only better Novembers were in 2020 (+10.75%), and 1980 (+10.24%). The SPY (S&P 500 Tracking ETF) rose 9.13%, for a barn-burning performance.
As we can see below, the Big Money Index (BMI) struck again. For those who don’t know what that means, when the BMI goes oversold, big bounces are almost always right around the corner. The BMI is a MAPsignals proprietary indicator of outsized money flows; it helps identify when markets are either overbought or oversold. We alerted you to oversold conditions in October and warned that a big lift was coming, so carve another notch in BMI’s belt, because it nailed the next big market move yet again.
In this chart, we see the BMI rise from below 20% to roughly 60%:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Don’t be surprised if the BMI goes overbought sometime in December or January. That could easily happen, because unusually large selling has just vanished, giving way to serious buying.
We can see that here in the charts of Big Money Stock Buys and Sells, and ETF Buys and Sells:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Notice how the red (selling) just stopped when October clicked over into November? I am still convinced (although I have no data to back it up) that October saw a selling peak due to forced de-risking. In other words, I believe there were fund blowups forced by overwhelming redemptions from investors, forcing liquidations. That selling was characterized by huge volume. But the huge November bounce was also marked by big volume, as seen here, represented by the amber bars. Normally, volumes are multiples larger when selling comes – because everyone sells. Buying usually brings lower sustained volumes and smoother growth, but money rushed back in during November (minus light volume over Thanksgiving).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I suspect this trend could continue, and even intensify. One main reason is that there is a contango (a situation where the futures price is higher than the spot price at maturity) going on between rates, inflation, and also economic data versus the news. Let me explain. First, let’s look at the CPI versus the fed funds rate. On November 14th, the Bureau of Labor and Statistics released their Consumer Price Index (CPI) for October, showing it unchanged at 3.2%. To spare you the details, energy prices fell, while food and shelter costs, while pesky, increased more slowly. With inflation unchanged, and the Fed funds effective rate at 5.33%, we are seeing a full 2.13% inverted spread between inflation and interest rates:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Historically, this cannot last long, as you can see in the chart above. Add this to the fact that market rates are falling like a rock. The 10-year note has fallen from a high of near 5% in October to roughly 4.35%:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Falling rates are good for some, bad for others. Those chasing high yields, in places like money markets, may suffer. Right now, there is the highest amount of cash in money markets on record, nearly $6 trillion:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Fed doesn’t like to fight market rates, and market rates are falling. That’s a recipe for key short-term interest rate cuts in the future. And while places like Goldman Sachs expect cuts much later – in Q4 2024 – and Morgan Stanley expects cuts in Q3 2024, I suspect rate cuts might come sooner, even as soon as Q1 of next year. Whether or not my prediction comes to pass is beside the point. One thing is clear: Rates will fall. And when they do, money will come flooding out of money market accounts and into stocks.
This November is evidence that the flow might be starting already. As we can see in the following charts, after October’s chaotic ugliness, money seems to be rushing into all sectors and especially into small and mid-caps. In the following chart, you can see all the unusual buys for November. Notice how heavy the concentration was in small stocks ($500 million to $5 billion) and mid-caps ($5 billion to $50 billion):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Investors are targeting deeply oversold value areas of the market, and November saw small and mid-caps getting some love. Interestingly enough, nearly all sectors are now seeing some love.
First let’s check in on the rankings for strength and weakness. Technology and Discretionary are once again on top. This is great as these growth areas leading out of the ashes of bearish action usually bode well for sustained bull markets. Energy Industrials and financials round out the top five.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Defensive sectors like Staples, Utilities, Real Estate, and Communication remain near the bottom of the list. Health Care remains a tale of Jekyll and Hyde. Many are old dividend plays, while the other half are young, growth tech-oriented companies. So there seems to be a persistent push-pull within the sector.
We don’t need to go into great detail on each sector. The main takeaway from the 11 individual sector charts, below, is that money is flowing strongly into all 11 sectors.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Perhaps even more telling is that selling has evaporated from all 11 sectors. If this were a rotational rally, we’d see selling in some sectors and big inflows in others, but that’s not what we see here.
Money is moving into stocks. Rates haven’t fallen yet, but when they do, I suspect that we are in for a very big run in stocks, one that will last for a while. The cash bubble is about to burst. When it does, I think tech and discretionary stocks will lead us to new highs.
After the forest fire comes new life. As Oscar Wilde said, “What fire does not destroy, it hardens.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Fourth Quarter Started Slow, but It May Finish Strong
Income Mail by Bryan Perry
Stocks Building on Gains Under the Power Of Bullish Fund Flows
Growth Mail by Gary Alexander
After a Bountiful Thanksgiving, Will Santa Deliver Too?
Global Mail by Ivan Martchev
A “Reluctant Rotation” Has Begun
Sector Spotlight by Jason Bodner
Only You Can Prevent (or Profit From) Market “Forest Fires”
View Full Archive
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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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