by Jason Bodner

February 19, 2020

Did you ever notice that people like things that are predictable and repeatable? We love routines. We love knowing what’s coming next, and we don’t generally like surprises – unless we know they are coming.

The same goes for our taste in music. As much as we like to think we are evolving intellectually, the further along we go, the simpler and more repetitive we like it, like it, like it. Colin Morris wrote a really cool (for us nerds) interactive article about repetition in music, elegantly titled: An Exercise in Language Compression: Are Pop Lyrics Getting More Repetitive? It reads like a scientific paper full of data.

Morris analyzed 15,000 songs that charted on the Billboard Hot 100 between 1958 and 2017. He applied an algorithm that compressed files (the kind you use daily) to songs. The amount he could compress them became a measurement for repetition. This is because compression works by recognizing repetition and creating references and deleting the repetitive data to be reconstructed later. The size reduction is the repetition. Long story short, Colin found that through the decades, songs became more repetitive. Look:

Repetition of Popular Music Chart

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

Next, he plotted all the songs on a bell curve. The purple songs are most repetitive, the yellow the least:

Repetition of Popular Music Bell Curve Bar Chart

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

But he did what many data scientists do: He excluded outliers. Watch when we include them:

Repetition of Popular Music Bell Curve with Outlier Bar Chart

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

Look how the whole curve shifts to the left! The outliers are so far off the charts that scientists often exclude them because they skew the results so much.

The king of repetitive songs is Around the World by Daft Punk. Here’s an excerpt from lyrics.com:

Draft Punk Lyrics Image

I love outliers: the positive kind. And when it comes to financial markets, the biggest hits in the market also tend to repeat year after year. That’s the key to market success…repetition.

I say this because I regularly look at market sectors. Which of them lead? Which lag? Which repeat? That information is useful to see where the market is headed and what’s leading it. The problem comes when everything is going up. All sectors get bought – except for energy. Here’s what’s happening now:

Map Signals Table

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

Those yellow boxes mean that 25% or more of the sector is getting big money buy signals. In addition, Consumer Discretionary (23%) and Materials (20%) were bought with only slightly less intensity.

So, when everything goes up, we need to focus on the outliers. In 2017, Arizona State Professor Hendrick Bessembinder showed that stocks outperformed Treasury bills from 1926 to 2016, but only 4% of stocks accounted for 100% of stocks’ edge above T-bills. Just 1% of stocks accounted for 50% of the gains. In other words, the outlier stocks are where nearly all the gains come from.  

The professor showed if you’re not in the 1% (of stocks), you’ll never be in the 1% (of richest investors). If you focus on finding outlier stocks, your returns should be golden. If you hold them and wait for these outliers to repeat time and time again, you get the big juice.

This Mapsignals Outliers paper shows what happens. In short, if you buy the most frequent-occurring outlier stocks every six months and then repeat, the results would have crushed the market.

Cumulative Return of Strongest 20 Portfolio (paranorm)

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

Now that we’ve established that you must be in outlier stocks, let’s get back to the sectors. I went back to my data on Mapsignals “top 20” reports. These are the top 20 outlier stocks bought by big money each week. I went back from January 1, 2019 and looked through the 1,160 stocks on the buy report.

Result: Almost 40% of the stocks have been tech:

Times On Top 20 Buy Report

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

So, it should come as no surprise that the returns year to date are so heavily lopsided to tech:

Indexes Graph

FactSet

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

Here’s the point: Leading sectors show us where the leading stocks are. Outlier stocks are the leading stocks getting bought by big money. When they repeat over and over, it’s a great winning recipe.

So back to that outlier chart above, here is where we want to live, because that’s where the juice is:

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

I say: Don’t toss out the outliers, focus on them. And when they repeat – like the most annoying earworms in the music world – get excited!

Finding success in music is stunningly like finding success in stocks. Look for repetition. Embrace it.

Malcom Gladwell, author of the excellent book, Outliers, said this about success:Success is not a random act. It arises out of a predictable and powerful set of circumstances and opportunities.”

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
Junk Bonds Don’t Believe the Coronavirus Threat (Yet)

Sector Spotlight by Jason Bodner
The Role of Repetition in Markets and Music

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

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