By Jason Bodner

February 4, 2020

I’ve been warning of a market pullback in the second half of January for many weeks now. I felt that the January Effect would lose steam. Pension funding and new annual investments would give way to something else, since the market was heavily overbought. The data said so. But many I talked with saw no signs of slowing. Every dip was bought. Every headline was shrugged off. But last week, the cracks in the “Buying Dam” finally gave way, and sellers came rushing in.

So, what’s to come?  As always, I look to the data… There are a few key data points to consider:

  1. The Big Money Index is Falling. Until buyers show up, we will see selling pressure. For weeks, the market was one-way buying. We highlighted it constantly. When big money investors move stocks in an unusual way, I get signals. To simplify, the top of a price range is a buy signal. The bottom is a sell signal. We saw virtually only buy signals for many weeks. The BMI measures these signals over a 25-day moving average. Above 80% is unsustainable buying. As you can see, the meter was in the red for a while. But when it falls, look out below…

    Russell 2000 Chart

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

    On January 21st, the BMI peaked at 87.6, meaning 87.6% of signals over the prior 25 days were buys. The next day, I published a white paper for Navellier & Associates detailing how volume data called for lower markets near-term. You can find that here.

  2. Today the BMI is 74%. Selling only started recently. We won’t revisit “overbought” conditions any time soon. Looking at the BMI another way, the next chart looks at net buys vs. sells. (More buys mean a green stick, and more sells than buys cause a red stick.) Notice from October, there has been only green? Markets went straight up. But when red sticks come, markets sag. Sellers take control. It may be short-term, but this spells turbulence ahead. Look at how suddenly red shows up:

    Russell 2000 versus Net Buys/Sells Chart

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

  3. ETF buying also plummeted. For weeks, we highlighted abnormally high ETF buying as a contrarian signal for near-term market prices. Look at the chart below to see how selling suddenly picked up. After weeks of green, here comes the red:

    Russell 2000 versus Net Buys/Sells Chart

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

  4. Sector selling has been brutal for energy. Almost everything got hit last week but energy was really beaten up. There hasn’t been a single buy signal in the entire sector in six trading days. Keep an eye on it: Energy is not yet oversold, but if selling continues, we will be well on the way. Should there be more Iran retaliation for U.S. airstrikes weeks ago, we could see a major spike in the price of oil, creating a bid for energy stocks. The exception for buying was notable in Utilities, a classic risk off trade and a clamor for yield as equity risk suddenly comes out of favor – even if very short-term.
MAP Signals Table

So, to summarize, I said there would be lower markets by the end of January, and I was right, even if just under the wire. But what lies ahead? We are now waiting to buy stocks again. Here’s why:

  • Friday’s sell-off was certainly a healthy pullback, but it wasn’t capitulation; it was orderly. We are making plans for a further drop before scooping up great stocks on sale.
  • China’s coronavirus outbreak is spreading to the business sector, and thereby the stock market. Several companies are closing locations. Any economic fallout from the impact of the Wuhan outbreak will actually strengthen the U.S.’ standing in trade negations. China will be at even further economic disadvantage.
  • U.S. stocks are still beating sales and earnings forecasts, and analysts are forced to revise their estimates higher. As of end-January, 73% of Q4 reporting companies beat earnings and 67% beat sales, according to FactSet.

Rates collapsed. The 10-year is at 1.52%, while the dividend yield on the S&P 500 is 1.81%. So you win with stocks, before and after tax. Because bond income is taxed at ordinary income rates, after taxes you end up with 53% more money in your pocket holding equities. With the 2 year yield at 1.32% and FOMC rates at 1.50% to 1.75%, the market is looking to force a rate cut.

Standard and Poor's 500 Dividend Yield versus Ten Year Treasury Note Yield Table

This is all bullish for stocks. Stocks went up too far too fast and need a reset. The market is healthy. Don’t let coronavirus scare you too badly. While any virus is serious, ordinary flu is way more fatal, so far. Health scares are a convenient excuse to sell – when Middle East tensions and impeachment hearings don’t raise an eyebrow. Right now, watch and wait, because selling should continue. But when it stops, the rush into stocks should be swift and fun to watch – and even more fun to take part in!

Sun Tzu said: “He who is prudent and lies in wait for an enemy who is not, will be victorious.”

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
A Viral Gift for the China Bears

Sector Spotlight by Jason Bodner
The Much-Awaited Pullback Has Arrived

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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