by Jason Bodner

March 1, 2022

We’re human. Sometimes we over-react, thinking we’re doing right. Like the dad in Messanges, France.

He just wanted his social media-addicted kids to sleep at night, not surf the net. They wouldn’t get off their devices, so he bought a signal jammer. He didn’t grasp the power of the illegal device: It knocked out communications in two towns. Complaints were investigated, and the well-intended dad now faces jail time and a possible 30,000 euro fine ($34,000). Maybe he could have just taken their phones away?

Oh well…

Stock markets also see their fair share of overreaction. As they say on Wall Street, “shoot first, aim later.”

I think we are witnessing a massive overreaction now. I think this recent correction was intentionally triggered, and I think there is plenty of opportunity to get back into good stocks at decent prices.

Let’s look at a lot of charts through the lens of the data, and what picture that data is painting for us.

The normally reliable Big Money Index (BMI) has been confusing lately. We see it has been moving sideways and getting choppy. The BMI works well in correlated markets (meaning when buying and selling gets imbalanced, over time, allowing trends to develop), but not so well in choppy markets.

Here is a good example of a trending BMI (from August 1, 2018, to August 1, 2019). We see it trending lower to oversold then exploding higher to overbought. Notice how the market follows the BMI (left)? We see individual stock buys and sells for the same time on the right:

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

The BMI works great in times like that. But that’s not what has been happening for the last 12 months.

Here we see the BMI frustratingly just chopping along. Again, BMI (left), buys and sells (right).

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

The reason is that the market has been in a giant rotation, like inside a washing machine, as sectors slosh around. Tech rose and fell while energy fell and rose. Other sectors exhibited similar behavior, while the indexes just rose because the largest stocks kept chugging higher, and their weight accounted for so much of the index that it masked the violent rotations underneath. In other words, things looked fine, but the broad-looking BMI didn’t reflect the big buying in energy and financials.

If we look at a sector view of stock buying and selling, we see this clearly:

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

The BMI didn’t show the big selling in tech, health, and industrials since November:

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

That explains why the BMI has been so range-bound, because the big moves are happening on a sector rotation level. And that rotation has been intensifying in 2022.

When we break down buying and selling by sector since January 1st, 44% of buys have been energy and financials. And over 50% of sells have been tech, health, and industrials:

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

The “washing machine” finally got imbalanced enough to push down most stocks since New Year’s Day. And now we’re in a storm of bad news, mostly rising inflation and Russia invading Ukraine (plus Covid).

Let’s address each one to understand what may lay ahead.

  1. Inflation fears are really interest rate I’ve already extensively detailed my case for the Fed, using what I call Ghost Tightening. In short, they use scary language and past playbooks to tighten the money supply while saving rate hikes for later, as a last resort. This way, everyone can expect and predict five to seven rate hikes, like Goldman Sachs loudly predicted, but if assets are sold in anticipation cooling the economy, then I believe the FED will raise only three times in 2022 to a target rate of just 0.75% to 1.00%. In other words, stocks are getting roasted in an over-reaction.
  2. Russia-Ukraine has squarely taken over center stage from inflation fears this week. The news of Russia’s aggression is spiking oil prices and rattling stocks. While I don’t believe anyone wants this war (other than Putin), I do believe it helps the Fed fight inflation. It’s counterintuitive but, as oil surges, Americans must pay more at the pump. And with food prices also rising, their dollars are diverted to essentials. Prices for discretionary goods should naturally fall back in line with less demand. This could also tighten the money supply in a ghost Most Americans are suddenly less spend-thirsty then they were two months ago. And now we all must pay more for gas and food.
  3. COVID news has virtually disappeared. The UK has lifted all restrictions. Ireland cancelled their pandemic measures. In the U.S., cases are down in all 50 states and the CDC is relaxing mandates. Reading between the lines: it’s over folks. I believe President Biden will announce the end of the pandemic designation in the coming weeks – after the Ukraine situation hopefully settles down. The absence of COVID from the headlines alone indicates far fewer people clicking on COVID stories.

The remaining wild card is how (and how soon) the Ukrainian conflict might end.

Let’s look to history. In 2014, Russia invaded part of Ukraine, resulting in the annexation of Crimea. The markets freaked out. ETFs are a great proxy for individual stocks as institutional investors use them for both broad and focused exposure. Below, we see a chart of all ETF buying and selling for the first six months of 2014. On the left, I circled the selling so that you can see how it led the market lower at the time of the initial invasion. But you can see the market just shrugged it off and kept on rising higher afterwards until the Fall. Then, October saw an Ebola pandemic scare and Europe’s sour economy.

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

But by then, the Ukrainian conflict was rear-view-mirror material. (Stocks bounced from Ebola too. )

Here’s 2014 onwards.

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

Today, we have an eerily similar setup. Left we see the same type of ETF selling this February as we saw in 2014. For context, I added the past two years of ETF buys and sells on the right:

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

Remember, I told you about energy buying the past two months? Leading up to the February 20, 2014 invasion of Ukraine, energy prices rose. Check out the Energy Select Sector SPDR Fund (XLE) during that time. For the month-long conflict, it chopped sideways. At the conclusion, on March 26, 2014, XLE rose for months thereafter. Below, the 2014 chart is left and now is early 2022 is right:

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

If history is any guide, this will blow over and ghost-tightening will do the Fed’s heavy lifting, resulting in fewer hikes than are priced in. Capital will flow back into growth stocks, lifting them later this year.

The market is the collective sum of all human behavior. Even machine-trading is effectively done by the codes written by real people, which means, given the human propensity to overreact, we’re witnessing the normal human propensity to over-react. Icelandic pop-icon Bjork knew it in her 1993 song “Human Behavior”: “If you ever get close to a human and human behavior. Be ready, be ready to get confused.”

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
The Stock Market Delivers a Successful Retest

Sector Spotlight by Jason Bodner
Markets Often Over-React – in Both Directions

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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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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