by Jason Bodner

December 8, 2020

My 9-year-old son loves his Rubik’s Cube. It wasn’t long before I stole it in a nostalgic fit. Transported back to 1982 – when I learned how to solve it. For those not familiar with the challenge, there are six different colors on the face of the cubes and each of the six sides of the cube has nine pieces on each side. That means there are 43 quintillion (43 followed by 18 zeroes) possible combinations. That’s six times the estimated grains of sand on earth. It seems like a fool’s errand to figure out a solution for the Cube.

It turns out that one can learn a few steps, coupled with a simple strategy, to unlock the solution. You can learn four algorithms and work one layer at a time and solve it every time. I have gotten my solutions down to a few minutes. I was proud of that until I saw that YuSheng Du broke the world’s record for solving a cube in 3.47 seconds. Many pros can consistently find solutions within 10 to 15 seconds.

Rubik's Cube Images

What does my recent nerdy Rubik’s Cube fascination have to do with stocks?

In an ocean of investment opportunities, it often seems impossible to consistently beat the market. It’s only natural to assume that the big winners in stocks somehow got lucky. But it is possible to consistently pick winning stocks, stocks that crush the market, year after year. How is that even possible?

It turns out that the Rubik Cube logic applies to stocks. There are virtually limitless combinations of ways to solve the market, but applying a simple strategy and a few algorithms can produce phenomenal results.

For example, our Mapsignals’ back-tested quantitative approach to stock picking found, early on, an average 13 of the top 25 S&P 500 stocks for almost 30 years.

The solution is simple: Identify when Big Money is buying superior stocks. The algorithms rank stocks for strength then flag them when they are getting bought or sold in a big way.

That’s it – a simple combination of concept and algos – like solving a Rubik’s cube.

Let’s begin with the big picture, seeing the Big Money flows in phases. The Big Money Index (BMI) just went overbought. This means 80% or more of our signals were buys on a rolling 25-day moving average. This indicates that buying is unsustainable and should peter out at some point in the near future. But, as regular readers know, that condition can last for weeks or even (like this past summer) for months.

In this graphic, we are in Phase 1. The market peak should be near Phase 2…

Big Money Flows in Phases Flowchart Image

When will the BMI peak?

Since our data began in 1990, the BMI has gone overbought 68 times. The average duration until the market peaked was 23 trading days. That average duration would put us at Wednesday, January 6th for when the BMI should peak. But keep in mind that 2020 saw a record length of overbought conditions: Since the first overbought reading on May 6th, the market stayed overbought until September 2nd.

December 2, 2020 would mark the third time this year that the Big Money Index has gone overbought. January, then May, and now in December. When the overbought reading finally peaked in February, it preceded March’s monstrous drop. July’s peak eventually led to volatility in September and October.

MapSignals Big Money Index Chart

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

The year has been extreme in buying and selling. Remarkably, we just hit another buying extreme!

Big Money Extremes Charts

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

November also shattered the record for biggest ETF inflows. Big Money data confirmed it too…

Big Money ETF Signals Bar Chart

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

Analyzing Big Money flows and what it means for stocks is like solving a Rubik’s cube in layers. First do one color on one face. Then the next layer, then the third layer. Using simple algorithms, you can solve it every time. I see the market the same way, only we are solving a picture and trying to snap it into focus.

  • First, we figure out the phase of Big Money: Now, it’s overbought.
  • Next, we look for when that condition peaks.
  • Next, we look at stock buying and selling
  • Then we look at ETFs
  • The next “algo” is snapping the market picture into clear focus by looking at sectors

In order to know where we are, we need to know where we’ve been. Since a vaccine was announced, Big Money has flooded into prior “dead” sectors and value stocks. Tech had been dominant the whole year. Recently it’s been held back while poorer performing sectors got gobbled up in anticipation of a reopen:

Big Money Reopen Sectors Pie Chart

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

The final “algo” for solving the market is on a single stock level. For that we look for stocks with growing sales, earnings, low debt, and wide business moats. When those get bought by Big Money, that’s when we get excited. Only right now, Big Money is favoring the “class clowns,” not the valedictorians.

That just means patience is required. Invariably, the leaders will return to leadership. Right now is a just a wicked “catch-up” trade positioning for when things get better. (Hint: they haven’t gotten better yet.)

COVID is still raging out of control. And no one knows when the average American will get access to a vaccine that will allow them to go out and spend money in the businesses that got battered by the virus.

It’s good to be early, but I think it’s better to be right consistently.

There’s a 1 in 43 quintillion chance that you randomly solve a Rubik’s Cube correctly. You may or may not have better chances for solving the market. Learning a simple concept and set of algos lets you solve the cube correctly every time. The same logic could be applied to the mysterious puzzle of stocks.

“If you are curious, you’ll find the puzzles around you. If you are determined, you will solve them.”

– Erno Rubik

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
Industrial Metals Predict a Stronger Global Economy

Sector Spotlight by Jason Bodner
Solving the Rubik’s Cube of Stock Market Logic

View Full Archive
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

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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