by Jason Bodner
February 14, 2023
If you’re stressed watching the market, you may want to hold a loved one’s hand, because studies show there are health benefits from holding hands with someone you love, including the reduction of stress and anxiety. Holding hands releases oxytocin, a hormone associated with feelings of love, trust, and comfort.
You should do that – especially today. You could also relieve tension by looking at historical data to have a framework for what the market’s next move might be. I would do both, since what the data says now shouldn’t stress us! As I’m about to show you, the data is telling us something that on the surface sounds concerning, but digging deeper may leave you feeling like you are holding hands with a loved one.
First, we need to discuss the Big Money Index (BMI). It has officially gone “overbought.” As you can see below, when the amber line rises above 80, that indicates an unsustainable level of buying:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Let me repeat something important: This does not mean the market is about to crash. Many people upon hearing “overbought” become concerned, thinking stocks might sink immediately. This may happen sometimes, but as you’ll see, history tells us that, most of the time, we go higher before stocks drop.
To quantify that statement, I wanted to research what an ‘overbought’ market looked like in the past and what it might mean for a portfolio from the first day of overbought, so I will summarize my findings here.
The first thing you should know is that an overbought BMI is a relatively rare occurrence. Our data set begins January 1, 1990. That now spans 8,316 trading days. The BMI has been overbought on 1,581 of those days – or 19% of the time – in 70 instances prior to the latest instance (February 8th last week).
Once the BMI went overbought in those 70 instances, I wanted to know:
- How long will it last, on average?
- How many days does it take for the market to peak after the first overbought day?
- Does the market continue to go higher, or does it fall right away?
- Where does the market sit relative to that peak on the final day of overbought?
- And what do markets look like after we go overbought over various time periods?
You’ll be glad to know I have all the answers to those questions.
They are in this table (which may be difficult to read, so I will summarize it for you, below):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Summary findings:
- The average overbought period lasts 22 to 23 trading days, or about a month.
- It took 16 days on average until the S&P 500 finally peaked.
- There was an average gain of +3.1% more after the first day it was overbought.
- Once the market peaked, it took on average six days until the last day overbought.
- The market fell an average of 1.8% from the peak to the last overbought day.
Here is a list of those findings in one line:
Well, that’s not so bad. But what about long after the market hits overbought? While you may expect a disaster, it’s nothing of the sort. The S&P 500 was positive – on average after 1, 3, 6, 9, and 12 months:
I can tell you from experience that these returns are far less exciting then when markets go oversold. That story is for a different day. For now, the takeaway is clear: There is no need to fear an overbought market.
In 2022, the equity markets experienced a lot of negativity, but as investors bought stocks – in the fourth quarter – it didn’t take too much to generate new buy signals. As I’ve recently highlighted – if we wish to see where the buying has been – it’s been everywhere. Look at these sector charts to see the evidence:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The buying last week has also been focused in small and mid-cap stocks, as it has been so far this year:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It is also interesting to see how the sector rankings are shaking up so far this year. Energy was #1 for nearly all of 2022, but this year so far, tech and discretionary rule the roost:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It is constructive for markets to see areas traditionally associated with growth being bought up. It may be part of a massive short covering rally. It may be a quant-quake or whatever the media is tag-lining it. But it doesn’t entirely matter what the cause. If it was short covering – that sparks real buying as FOMO kicks in for bargain hunters. This then cascades into indexers needing to keep up by – you guessed it – buying.
The pace of buying is the topic here. The BMI says the pace is unsustainable. But 33 years of history says that, based on averages, we still have possibly weeks to go before we leave overbought territory. History also shows (in the chart above) several instances of the market being only one day overbought.
What happens is anyone’s guess. Thus far February has been shakier than the strong start to the year. Either way, history also tells us that even if we face some choppy waters in the upcoming weeks, markets on average are higher 1, 3, 6, 9 and 12 months after the first day of overbought.
So, caveat emptor (buyer beware). Buying stocks into an overbought BMI may not kill you, but just know that an overbought BMI simply says that the buying pace can’t continue like this forever. The average is 23 days, with 16 days until we peak at about +3% higher. That puts us around March 10th.
We’ll see. After Super Bowl #57, why not close with a championship football coach’s wisdom?
“The key to winning is poise under stress.” – Paul Brown
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
New Realities in the Energy Patch Promise Higher Prices
Income Mail by Bryan Perry
Is This a Healthy Pullback, or Resumption of Bear Market Selling?
Growth Mail by Gary Alexander
The State of the Market & Economy at Mid-Quarter
Global Mail by Ivan Martchev
The Fed Does Not Need to “Do More”
Sector Spotlight by Jason Bodner
A Valentine’s Day Market Tip
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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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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