by Jason Bodner

March 10, 2020

Patient: “How bad is it doc?”

Doc: “I have some bad news, you’re really sick.”

Patient: “Can I get a second opinion?”

Doc: “Sure- you’re ugly too.”

It’s a classic joke, so bad it’s good. We all need a little levity right now.

Bad news has us all crawling out of our skin: “Global epidemic of a deadly new virus.” Epidemics are real and so is the resulting fear, causing panic. Shelves are empty where hand-sanitizers were plentiful.

Fear can create a positive outcome. In 1942, Polish doctors Eugene Lazowski and Stanislaw Matulewicz actually saved 8,000 Jews by creating a fake Typhus epidemic. As a result of this fake rumor, Germans quarantined the area instead of risking entering the Jewish ghetto to send them to concentration camps.

Fear right now is gripping the market. Epidemics keep people indoors and slow down business traffic. Life may grind to a halt.  Italy is quarantining 16 million people.  China did the same to perhaps hundreds of millions.  Results were good for containing the spread of COVID-19 in those areas, but the economic impacts could potentially push the globe into a recession.

So how bad is it, doc? How long until the market gets better?

Like many a doctor would say – “it depends.”

For a scientific approach, let’s look into the data and check the lab reports:

Highlights from My Sector Lab Work

Ordinarily, I spend a lot of time looking at the leading and lagging sectors. That’s fine in a normal market, but when fear hits, these sector correlations dissolve.  The broad picture reflects what we’d expect in an unprecedented health scare. Defensive sectors outperform. Utilities and Real Estate see less selling than growth-oriented sectors. Investors look for a safe haven and yield.  As the Fed cuts rates, high dividend payers collect capital, with collect being a relative term, as these sectors are seeing less intense selling.

Map Signals Table

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

Health Care and Consumer Staples are also hanging in there, relatively speaking.  Health companies naturally benefit from sick people.  It’s a sad and undeniable truth. Imagine the 1-day soaring stock price of a company announcing progress on a coronavirus vaccination. And major consumer staples companies could see sales surge as scared consumers stock up.  Think of the big drugstore chains of the world.

Financials are hurting due to rate cuts, with likely more to come. Lower rates hurt bank stocks.  Also, as many events and travel plans are cancelled, insurance companies will see more claims.  My 15-year old son is bummed that Miami cancelled the Ultra Music Festival, which averages 60,000 attendees a day for three days. Local businesses will get creamed as many anticipate this event each year. Possible insurance liabilities seem endless: Artist contracts, vendors, trucking, production crews, security costs, etc. mount.

There is huge selling in Discretionary stocks and leisure companies, like cruises and hotels too.

Want a second opinion? Selling is just plain ugly for Energy stocks.  Oil cratered on Friday, down as much as 10% intraday. Crude Oil closed at $41.57 Friday and is set to open around $32 on Monday.

Getting Deeper into the Lab Work

During the first week of the market collapse, on Friday, February 28th, we saw huge Big Money Signals: 1,571.  The only other time in the last 5+ years that happened was the low on December 24th, 2018:

Big Money Signals Chart

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

So, are we out of the woods? No, not yet. The selling last Friday March 6th was also ugly, but not reaching the December 24, 2018 levels. The chart below shows each time the aggregate Big Money Signal count hit twice the 25-day moving average.  To simplify, this shows huge volume.

Big Money Signals Hit 25-Day Moving Average Chart

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

The takeaway: Generally, massive volume coincides with local market troughs.

Looking back since 1990, Mapsignals data shows that this has occurred 139 times. From that point forward, the average returns were mostly positive but were near-term (one month) below average.

Standard and Poor's 500 Average Returns After BMI 25 DMA Table

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

The thing is: We haven’t hit that level yet. We likely will hit it soon, but not yet.

This fits my narrative of likely further downside over the next two weeks.

Comparative Markets to This Situation

How close to a market bottom are we?

Seven of the last nine trading days saw a BMI reading of 5% or lower. That means 5% or fewer of all signals were buys on a given day. That’s extreme selling. This chart shows the 339 times that’s happened out of 7,601 days going back to January 1, 1990. Notice again, the instances line up with troughs.

Big Money Index - Extreme Selling Chart

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

Mapsignals measures days of huge buying versus huge selling.  The Big Money Index (BMI) is a 25-day moving average of these results. Readings above 80% are overbought, after which markets have tended to fall fairly soon; 25% or lower is oversold, and historically that has been a buy indicator, since markets historically recover sharply after oversold conditions. The BMI currently reads 44.8%, meaning 44.8% of all signals have been buys on a 25-day moving average.

The first day a market goes oversold is not always the same as the last. Just 276 days out of 7,602 have registered oversold readings. While it’s rare, it can last a while. There were 16 Oversold cycles in the last 30 years. Each cycle lasted between one and 49 days. The average cycle was 15 days. Here are the forward returns from both the first day and last day of oversold.  Both are very promising:

Standard and Poor's 500 Average Returns after Big Money Overselling Table

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

HOW MUCH LONGER UNTIL I FEEL BETTER?

Again, we are not yet oversold.  This supports my narrative of more downside to come. Our estimate to hit oversold conditions is roughly another two weeks. Revisiting two weeks ago, our data indicates a market trough 21 days from when selling was 8x the 50-day moving average. Results are on average dating back to 1990. My lab work suggests that Friday March 20th is when we see a washout bottom.

Days of Selling - 8X the 50-Day Moving Average Table

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

CONCLUSION

My data strongly suggests more downside ahead. We are not yet oversold. We likely must retest the lows.

We lag China by a few weeks. They are successfully climbing back from battling coronavirus. If their market is any indication of what’s to come for us, it’s a good time to be buying great stocks on sale. According to FactSet, the China Shenzen “A” Share index is +19% from its February 3rd low of 1683.17.

Final thought: Don’t fear recessions. While it may not be fun to live through, the market damage usually precedes a recession, as the market is forward thinking.  Post-recession returns have been “lights-out”:

Post Recession Performance Table

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

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
With Saudi Help, Oil is Headed into the $20s

Sector Spotlight by Jason Bodner
History Indicates the Market Could Bottom Around March 20

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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