by Jason Bodner
February 13, 2024
It turns out that, according to studies, 20% of the population is indecisive. But leaders tend to make decisions quickly. Indecision can be paralytic and cause more harm than making a wrong decision.
It’s decision time: What do we make of this market? We are at a crux, and we need to decide: Or do we?
If Buy or Sell are “Door #1” and “Door #2,” sometimes investors are best off with Door #3: Do Nothing!
I always say that we can’t trust headlines to make our investing decisions for us. I have long felt that an unemotional data-based approach holds the key to long-term success. So far, after 20 years of investing like this, it hasn’t failed me yet. But sometimes the data can be contradictory and confusing. Now is one of those times. Today, I’ll try to give you some qualitative analysis to the contradictory quantitative data.
Here’s the issue facing us now: the Big Money Index (BMI) has finally fallen from its overbought level. The BMI is a 25-day moving average of unusually large money flows. Basically, we take all unusual buying and unusual selling and net them off into a 25-day average. It looks like this:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The blue area is the SPY (the S&P 500 tracking ETF), and the amber line is the BMI. When the BMI rises, money flows into stocks. When it falls, money tends to flow out. When the BMI is above the red horizontal line, that indicates an overbought market: buying is unsustainable, and we expected buying to exhaust at some point. And when the BMI falls from overbought, historically, we expect volatility.
Look at the following chart, showing typical weakness after the BMI falls from overbought since 2009:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Going back even further, to 1990, we can see that 1-month returns are just slightly over flat – including the latest fall from overbought:
So, what’s so confusing? The market should fall now, right? So far, that’s not happening. In fact, we just hit another all-time high on the S&P 500 and NASDAQ. All is right with the world and stocks are rising.
Not so fast. Throughout history, stock buying and selling move in a cycle. Consulting the chart below, we are somewhere between phase 1 and 2 (closer to 1). This means buying is now just “slowing down”:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That’s a key point! The BMI is not falling because big money is suddenly rushing out. It doesn’t work that way. The BMI is falling because buying just slowed down. That context is key, because if we look at buying and selling of stocks and ETFs, we notice two things:
1. The immense buying in December recently rolled off the 25-day calculation, making the BMI fall.
2. Clearly, there is no immense selling at this time.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Volume is drying up at the market top, but look at the chart below: It shows unusually large trades. The rally to highs is not accompanied by dwindling volume. It’s healthy activity pushing indexes higher:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
For now, I am not concerned about an imminent pullback. For this to occur, I’d have to see convincing selling. As of Friday February 9, according the FactSet Earnings Insight, earnings metrics are solid:
With roughly one-third of the S&P 500 still left to report earnings, I think strong earnings will continue. The key now is guidance, since forward-looking statements affect stock prices. In my opinion, downside volatility shouldn’t arrive until earnings season concludes and there is a lull in company specific news.
The BMI says we should expect lower prices. History says that should have already started happening. But given the strength of buying, lack of selling, and the fact that we are only midway through earnings reporting season, I am comfortable riding the wave until we see some indications of increased selling.
Meanwhile, the pockets where we see significant accumulation are very strong bullish signs. First, we see that buying has been heavily focused in small- and mid-caps – a trend we have observed since November.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Next, let’s look at where the leading sectors are. That has always been a great gut-check exercise for finding underlying strength. If the leading sectors are growth-heavy, that’s a very bullish sign, and that’s what we see here: Tech, Industrials, Discretionary, Financials (despite the recent regional bank woes) and Health Care are the top-5 ranked sectors. Defensive sectors are ranked near the bottom. That’s solid.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Next, if we monitor the individual sectors for unusual buying and selling, we see no real hidden snakes in the grass just yet. Tech, Industrials, and Discretionary are seeing healthy green buying even if it curtailed from December’s outsized accumulation. But I want you to look specifically at Financials:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Did you notice anything? Despite the sudden fear mongering headlines surrounding potential trouble with regional banks, I don’t see any unusual selling in financials yet. That says to me that smart and big money aren’t shedding bank risk just yet. In fact, the only selling I can see at the sector level is Communications. But even that’s not a red flag as that sector’s universe for stocks that can be traded by institutions easily is only 20. That universe is tiny compared to say Health Care, with 232 stocks.
I’m basically saying: Don’t stress about communications selling, because there’s no selling to speak of.
To summarize, the BMI falling from overbought is a yellow flag, but as we dig deeper under the surface, we see no red flags of deterioration other than slower buying (between Phase 1 and 2). If selling should begin, that’s just another yellow flag. It is entirely possible we can go back to overbought status if buying picks up again. For market timers, this means that contradictory information is here, so I must see more decisive action one way or another before I have any higher conviction about near-term market prices.
For the moment, I remain bullish. We can’t constantly worry about failure.
As Kobe Bryant put it, “If you’re afraid to fail, then you’re probably going to fail.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Bull Markets Climb a Wall of Worry
Income Mail by Bryan Perry
Key Market Takeaways in a Record-Setting Week
Growth Mail by Gary Alexander
Rapid U.S. GDP Growth is Disputed by Two Other Measures
Global Mail by Ivan Martchev
The Tape is Getting a Little Stretched
Sector Spotlight by Jason Bodner
Buy, Sell, … or Do Nothing?
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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