March 19, 2019

Talk about a longshot. In 1923, a horse named “Sweet Kiss” was a 20-1 outsider in a steeplechase race at Belmont race track, New York. The jockey was no jockey at all, but a 35-year-old trainer named Frank Hayes. Furthermore, he suffered a heart attack and died in the middle of the race, but his horse kept on going, so fast he won the race. Hayes was winless before the race and remained winless while alive.

Well, if horse racing isn’t your thing, I am guessing markets are. Back in December, it seemed like you would have gotten better odds for a dead jockey winning the Kentucky Derby than a +20% market rally in under 12 weeks, but we live in strange times and those who took the bet are smiling now. I won’t strain to pat myself on the back, but while we were living on The Planet of the Bears, I was lonely but bullish.

The nay-sayers have piped down considerably in the past 10 weeks, but did you notice last week when the market fell under some pressure, the news headlines immediately adopted a sour note?  Headlines turned negative in an effort to seize eyeballs. For sure, we should pay attention to see if any fundamentals have changed, but when market slippage is met with immediate buying, we should also pay close attention.

We have now spent 26 trading days with an unusual institutional (UI) buy/sell ratio above 80%. The ratio had been declining, but it has stopped falling. And now buying is picking up again. This all started on Monday March 11. Looking at the table below, you can the green column of buying, for March 6th, 7th, and 8th, as the buyers went on vacation. Well, last week they came back and pushed the market higher.

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

As you can see, that right-most column is the 250-Day Moving Average of the daily measure of buying to selling. It has caught itself and, as buying resumes, we can expect the ratio to start moving higher.

Now, why do I care so much about this ratio of supposed institutional buyers over sellers? Well, I believe that so much of the market’s behavior is dictated by what the big money is doing. Wall Street has forever been fixated on what the “smart money” is doing, but it has had few ways of actually observing and measuring their behavior. That’s what makes this approach so unique. That’s why I focus on this ratio. It can be an excellent guide for future trends, especially at or near market lows.

Don’t just take my word for it. Let’s have a look into 30 years of market price behavior.

What the Red, Green, and Yellow Bands Tell Us

The chart below may look like a groovy 1960s psychedelic album cover, but the trippy colors are actually telling us something about unusual institutional trading activity and its extremes.

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

Let’s walk through this chart. The rising big blue mountain range is the S&P 500 price plots for 30 years. When we look at the colored stripes in the sky above it, we notice immediately that most of the time in the past 30 years was spent in yellow. The ratio is yellow when the ratio is in the middle of the range – for our purposes 50% to 70%. This means when the buying is slightly more than selling. This is a healthy reading which indicates a market grinding higher and not at much risk of getting out in front of its skis.

What we should notice next are the green bands. These are readings of extreme buying, periods of being “overbought.” Timing tops with green bands are not always conclusive, but typically line up with advances in market prices after periods of being overbought – not often preceding big drops.

The most interesting correlation of this chart must be the red bands to local troughs in the S&P 500. Red represents periods of prolonged or unsustainable selling, lining up very nicely with market bottoms. This gives further visual evidence that when the market goes oversold, we can expect higher prices afterwards.

So right now, we are in a period of sustained extreme buying (green), which the above chart tells us, more times than not, that we can expect bullish action. This is especially true in the wake of a big washout, the likes of which we saw in late 2018, especially going into the Christmas break.

The best part about this, for me, is what we are observing in terms of what’s being bought. Looking below we see our index and sector returns from Christmas Eve, 2018. Growth is leading the charge. The Russell 2000 and NASDAQ are each up roughly 23% since then. That’s “dead jockey” performance!

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

Leading the growth charge this last week was undoubtedly Information Technology. It vaulted 4.9% for the week. And the Infotech index is up +26.7% since Christmas. Energy, Health, Financials, Materials, Real Estate, and Discretionary were also strong performers last week.

The defensive categories have not performed nearly as well since December lows. But when we look into lesser known indexes, we start to really see what’s up. The Russell 2000 Growth index is up +26.4% since Christmas. The Russell 3000 Growth index was up +3.1% last week alone. But once again there is a clear head-and-shoulders above everyone winner.

And that winner is Semiconductors.

The PHLX Semiconductor rose 5.6% last week. AVGO’s strong Friday performance is helping bolster the entire group. Since the December lows, the PHLX Semis Index is up an astonishing +30%.

Putting unusual buying and selling into context, this action shows that this V-shaped recovery is for real. This is not a rotation out of growth into defensive. This was a rotation out of growth, back into growth.

This is evident on a per stock basis as well. Look at where the biggest buying was this past week. There was hardly any selling to speak of market wide, and buying was concentrated in Infotech, 114-to-2.

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

When consensus is pervasive and unidirectional, beware. The bears were out there, saying the bull was dead. But if you had bet on a 20-1 horse with a winless jockey who died mid-race, you would have won that bet. Sometimes one voice can’t be drowned out by the many (if you can silence them out). As Nobel laureate Malala Yousafzai said, “When the whole world is silent, even one voice becomes powerful.”

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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