by Jason Bodner

March 17, 2020

The world changed almost overnight. Coronavirus fears are grinding the entire world to a halt. That’s why this time it’s different. The latest pandemic has thrust everyone into a still-orderly panic. I live in South Florida. The population down here is largely elderly. It seems for now that the hottest item is toilet paper, because when the Apocalypse comes, that’s the currency to hold. Toilet tissue is the new gold.

This was the scene in the toilet paper aisle at my local grocery store last Tuesday. Notice that one person was in such a rush to grab toilet paper that he/she totally forgot their cane – the only item left on the shelf.

Empty Grocery Shelves Image

In all seriousness, this virus is a deadly issue. Millions will be infected. Many thousands will die. It’s tragic and I take it very seriously. But as a data man, the odds are vastly against any individual’s death by COVID-19. Any death is tragic and unwanted, especially if it is preventable, so I am doing my part, relaxing in my home with plenty of handwashing. Here’s an example of my social distancing yesterday:

Social Distancing Image

Here’s the deal: We will get past this if we persevere. Humankind has faced countless health scares in the past. We lived through plague, polio, a major 1918-19 flu, smallpox, measles, and too many others to name. There’s been a major outbreak every year and a half since 1990. Here’s a chart I compiled of most of the major epidemic outbreaks of the past 30 years, overlaid on the S&P 500 Index.

Epidemics and Stocks Chart

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

In his column on this Website today, Gary Alexander writes: “Jeffrey Kleintop at Schwab has done the heavy lifting of comparing market recoveries to all of the major epidemic outbreaks of the last 40 years, and he came up with the following chart of stock market returns in the global arena (using the MSCI World Index) in the 1-, 3-, and 6-month periods after the initial outbreak.”

World Epidemics and Global Stock Market Performance Chart

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

A picture emerges that echoes Warren Buffet: Short-term markets can react wildly to headlines, but long-term stocks are the place to be. Translated to an action item: Years from now, this market rough patch will prove to be the opportunity of a lifetime.

The message is clear: Be prudent and take care of your family’s health and your own, but don’t lose sight of this unfolding opportunity. Phenomenal deals are emerging in stocks. When stores announce sales, making room for next season’s inventory, it always sounds great! “Hurry! These deals won’t last!” But stock market deals don’t come with such tempting headlines. They are usually wrapped in messages of doom and gloom, begging you to stay away. That’s how it works. We fear even lower prices to come.

Facing those fears, we need to address the bear in the room. Last week’s price action shoved us into a bear market, which is classically defined as market prices 20% or more below the previous high. Indexes have now retreated by more than 25% from their highs. Some are asking if this is the shortest bear market in history. Friday’s rally, while immense, was largely at the end of the day and was mostly a computer-driven short-cover rally, in my opinion. So what does our data say about bear markets?

Profile of a Panic: 3044 Sells vs. 14 Buys!

Last week registered the biggest selling in Mapsignals’ 30-year history. We saw 14 buys against 3044 sells. We also saw 13 ETF buys vs. 571 sells. ETF buys were in either long Treasury products, levered long gold, or inverse levered market products. More importantly, our Big Money Index (BMI), which measures big buying to selling dropped to 33.2%. The sellers are in control.

The good news is that we will likely be oversold next week (BMI 25% or lower). Historically, markets can’t sustain this level of selling for long. That means we will likely see a bottom, or at least a bounce.

Here’s another interesting result: Over the past three weeks (starting 2/24/20), the number of stocks showing out-sized volume was an unprecedented 1,394 per day, on average. That may not mean much until you consider this: Our universe of stocks tracking big money activity is around 1,400, so that means 99.57% of our universe is showing big volumes! Usual readings are 500 each day for the last 15 years.

To show you how deep and wide this selling goes, look at the following sector charts. These charts plot buy and sell signals against sector indexes. It gives you a good idea when a sector is oversold.

Some of these sector charts make me sit back and say, “Wow!”:

Sector Charts Image

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

That’s what we see under the hood.

Here’s the deal: I’ve seen a lot in my years on Wall Street. On one level, this situation is very similar to the crisis in 2008 – 2009. Price dislocations are rampant. Things are broken. We saw days when stocks, bonds, gold, currencies, crypto… everything went down.

That means liquidation. Investors are scrambling for cash. That also means there’s nowhere to hide for those who are levered. You can see it in gold prices, bitcoin prices, bonds, and stocks.

Liquidity is like oxygen for companies, and those who haven’t prepared correctly will face consequences. If businesses must shut down for extended periods while we try to slow the spread of coronavirus, there might not be enough liquidity to keep them afloat.

That’s what got Wall Street in a fluster. It’s not just coronavirus and the energy prices falling – it’s liquidity. I saw this in the 2008 Financial Crisis. Wild daily market swings, like now, were commonplace.

Today’s activity is rhyming with what happened then.

I also recall that events like last week leave most investors unprepared. Moves of three standard deviations (3-sigma) account for 99.7% of all observances. Many funds are set up to weather 3-sigma events. Well, last week was a 7-sigma event. Nicolas Taleb called these “black swan” events.

When funds are leveraged and set up to handle 3-sigma risk, and a-7 sigma event comes, it means “game over.” Last week screamed “liquidation.” I believe we will see many firms go under.

Now. let’s talk about the future, and why this is shaping up to be an incredible buying opportunity.

This too shall pass, likely months from now. I envision my kids one day studying what went wrong with the crash of 2020. And when they and ask me, about a decade from now, I’ll say:

“I saw strange and incredible things happen. That’s why I bought stocks in the crash of 2020. I focused on great companies with wide moats, fat margins, and plenty of cash. I even bought stocks for you.”

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Jason Bodner

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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