by Jason Bodner
February 7, 2023
If you’ve been reading my column for any length of time, you’ll know I love to start many columns with oddball facts. I’ve used offbeat factoids ever since November 2012, over a decade. At over 530 weeks, I’ve seen a lot of facts. Some make me giggle, gag, or just scratch my head, but research shows that our emotions play a significant role in stock market behavior and can often drive prices higher or lower.
That seems frustrating until I remember that not everyone is immersed in the stock market the way I am. The truth is that most people don’t really care about the market’s daily gyrations. Most investors have important jobs to do, like save lives, feed people, or build houses. Stock analysis is for us addicts, but as an addict, I spend an inordinate amount of time studying them and crunching numbers.
In 2001, I learned the hard way about emotions after “trusting my gut” for about a month. I traded on that “inner voice” for a month and lost 19 of 21 times. Only after I removed all emotion and went full “quant” did I start to see some consistent success in my stock picking and investing.
But I’ll let you in on a little secret: The stock market needs all those emotional participants. It can’t really function without them. The show goes on precisely because there are different types of emotional people (and irrational machines) investing every day. The deal seekers need scared emotional sellers to buy from, and the bears need greedy, irrational buyers to sell to. And so the beat goes on, and on…
That’s perhaps why the backdrop of information surrounding stocks is always so – well… emotional! News stories are designed to stir greed, fear, or indifference. Anything to get you to stay tuned in and see advertising. Once the media has achieved its goal, the viewer is armed to go make investment decisions.
That doesn’t necessarily mean they are good decisions.
Why am I telling you this? Because I study deep data that no one else does. I look at unusual institutional buying and selling according to algorithms that I designed. In the aggregate, that information says that something big is happening – and no one else I see is really talking about it:
Investors are voraciously buying stocks
Let’s start at the top: the Big Money Index (BMI) is a 25-day moving average of unusual buys and sells for stocks and ETFs. It has been steadily rising after a brief, barely noticeable pause in late January:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The BMI tells us that buyers are clearly in control. This makes sense, since the markets are generally rising, but as we’ll discover, this doesn’t look like a “reversion bounce” before a tumble to new lows.
Before we get into that, we should notice that the BMI is getting overheated and hurtling towards “overbought” territory. Before you go sell any stocks, however, it’s important to note that what matters is not so much that the BMI may go overbought. What matters is when it starts to fall from overbought. The BMI can stay overbought for a long time. Once, post-COVID, the BMI stayed overbought for 87 days!
The downbeat headlines may not indicate any optimism out there, but there is monster buying going on:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Not only is there a three-month high of buying, but it’s the most buying we’ve seen since June of 2020:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
ETFs can’t be scooped up fast enough, either. Similarly, we’re seeing the most ETF buying in years:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
OK, so there’s a lot of big, excited buying, but what are they buying? The truth is, as I’ve said in the last few weeks, they’re buying everything, but especially the stronger (growth-oriented) pockets of the market. Looking at the table below, we can see the latest sector ranking. What I want you to notice is that the growth areas are getting gobbled up most. Discretionary and tech stocks rank #1 and #2, respectively. Then come Materials and Industrials. Defensive areas are getting bought, too, but with far less intensity:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When you look at the individual sector buying and selling – a clear picture emerges. Focus especially on how the recent spike in buying measures up over the last six months:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
There has literally been “off-the-charts” buying in discretionary, tech, materials, industrial, real estate, financials, and health care. To drive that point home, look at the distribution of buying since the beginning of 2023 by market size. There has been huge buying of small- and mid-cap stocks. That means value hunters are scooping up cheap small-cap tech, discretionary, materials, and industrial companies.
That’s not bearish behavior, folks…
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Whether that’s short-covering or high conviction buying, those areas indicate betting on a recovery. The market is a forward-looking machine, so while Fed chair Jerome Powell delivered a mixed message on the economy, investors found reasons for cheer in his words. Properly parsed, he was saying: “It’s working. We may not be out of the woods yet, but we will be, and we’re close to the top of rate hikes.”
Lest I sound overly rosy, let me also issue a warning: Stocks will likely pull back, near term. We’re off to a great start to the year. The playbook is working perfectly – especially my prediction of a strong October-to-April, due to this being a post-mid-term election year follow-through. Remember, 10 of 10 mid-terms were positive for stocks since 1980 from just before the election through the following April.
But as the BMI comes within spitting distance of becoming overbought – and we combine that with off-the-charts buying in both stocks and ETFs – the buying exhaustion point is growing near.
That said, February may be bumpier than January. Historically, that is often true, but the rest of the year should be quite bullish for stocks, based on prior observations, especially given what they are buying now (small and mid cap tech and discretionary). Just remember, we need both the emotional and emotionless types in the market; that’s how it works. William Feather knew it when he said: “One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Global Fallout of the Fed’s Decision
Income Mail by Bryan Perry
The Market Will Likely Pause Until Some Obvious Questions Are Answered
Growth Mail by Gary Alexander
We’re in the “Sweet Spot” of the 4-Year Presidential Cycle
Global Mail by Ivan Martchev
A Big Euro Sell-off (Dollar Rebound) is Coming
Sector Spotlight by Jason Bodner
Emotions Drive the Market – But We Are Just Observant Passengers
View Full Archive
Read Past Issues Here
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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