by Jason Bodner
March 21, 2023
Did you feel extra hungry last week?
I only ask that because stocks were “red-washed” last week. Heavy selling, especially in financials, but spreading to energy stocks as well, rocked the markets and left most stocks in the red.
Confused? Well, red can evoke feelings of hunger. That’s why it’s often used in restaurants and food packaging. Studies show that people tend to eat more when they are exposed to the color red. This may be rooted in biology. People get red in the face when mad or embarrassed. And studies suggest that drivers are more aggressive and quicker when being blocked by red cars than other-colored cars.
I try to invest unemotionally, but when I see an all-red stock market – it makes me uncomfortable. I notice physiological instinctual behaviors rising. I grab a snack to help with stress. I try to look away. I try to “clear my head.” What’s really happening here?
Emotional and psychological instincts can easily cloud sound judgment in the form of rational thought. In other words, red stock listings trigger emotional responses, and not always logical ones.
After we digest that fact (pun intended), we can look objectively at what the data presents. Let’s begin with institutional inflows and outflows. It should come as no big surprise that outflows are dominant. The BMI went overbought February 8th. After peaking it fell out of overbought February 17th and SPY troughed -5.4% ever since. Currently the BMI reads 42% and is closer to oversold than overbought.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That might cause alarm, but if the 25-day average of buying vs. selling continues – getting to oversold could take longer than you might think. The past 25 trading days has 40 average buys 87 average sells. That carried forward would bring us to oversold levels 16 trading days from now, or roughly 3+ weeks.
Naturally, there’s a potentially cheerier alternative: selling exhausts itself and the market rallies. I’m not saying that will happen, only that it could. And more importantly did. Looking at the BMI chart above you can see similar action from December to January, after a sustained rally period – again similar to February. The main caveat here, is that recent selling is significantly more severe than December/January but less severe than the dismal September of last year. We see this for both stocks and ETFs:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now we can start to look at where selling was concentrated. Since March 6th– we see clearly that small and midcap stocks bore the brunt of the pressure:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Next, we will look at sector strength and weakness. But before we do – let’s take a moment to discuss how we got here in the first place… The Fed is fighting its war on inflation. The fact is, with the benefit of hindsight, they were slow to react from the fears from COVID. Looking at the chart below of the Fed funds rate, we see that the latest cycle of rate hikes was actually the fastest on record.
Imagine that these rate hikes were slower and started earlier… perhaps we wouldn’t be in the current conundrum. Speaking of which, the fault of the bank failures which occurred over the last few days is debatable. On the one hand, SVB was collateralizing deposits with government bonds, the perceived safest investments out there. That’s good – unless of course, the Dodd-Frank act was rolled back, thus reducing the amount required to be kept in reserves, and unless SVB was buying treasuries in a zero interest rate environment. If rates were almost certain to go up, the value of the collateral (bonds) was sure to go down. Now we get back to the chart of the Fed funds rate… notice the parabolic spike in rates:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I took the liberty of adding an orange line depicting a slower, steadier hypothetical hiking cycle. Should that have taken place, perhaps the ailing banks would have had more time to adjust. So, was it the fault of SVB and other banks for poor choices in collateral? Yes. Was it the fault of abolishing of the fractional reserve system in favor of a zero-reserve system? Yes. Was it the fed’s fault for zapping us with aggressive chemo style rate hikes? Yes.
Does it ultimately matter who’s fault it is?
Maybe.
Will it change where we are?
No.
So, panic rocked depositors who made a run on the bank (SVB) faster than they could liquidate collateral. Assuredly, this will be researched and documented for years to come. Needless to say, this is what rocked markets of late. The Fed came out and guaranteed deposits for SVB and Silvergate. First Republic got a $30 billion injection from JP Morgan and Bank of America. Credit Suisse came under fire for liquidity and accounting concerns. The Swiss National Bank intervened and failure thus far, is averted.
Moving on to sectors, we see that the strength and safety trade is in the unlikeliest of places: tech and discretionary stocks… Bizarro World continues. Unsurprisingly, financials was a bottom-dweller:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Fleshing this out a bit, we see that selling hit the whole market last week. That said, tech and discretionary stocks didn’t see as intense selling as they did last September. While we see heavy selling in Industrials, Materials, and Healthcare stocks, it’s plain to see the real pain was in Financials and Energy stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Where does the market go from here? The BMI visually implies we are on the way to oversold. The law of averages, however, says that’s possibly 3+ weeks away. The potential pivot comes tomorrow, at the FOMC meeting and Summary of Economic Projections… the “dot plots.” Should Powell give dovish statements, stocks could soar. Should he be stubbornly hawkish, stocks could swoon.
I’d add that after a week of grilling at the House/Senate Committee hearings, and the latest financial shoes to drop, that there is real risk of tough-talk, triggering another serious crack in our financial system.
All eyes will be on this week’s Fed meeting. Let’s hope Mr. Powell recalls James 3:5, which says, “The tongue is a small thing, but what enormous damage it can do.”
Navellier & Associates Inc. does not own Silicon Valley Bank (SVB), Silvergate Bank, JpMorgan Chase & Co. (JPM), Bank of America (BAC), Credit Suisse Group (CS), or First Republic Bank (FRC) in managed accounts. Jason Bodner does not personally own Silicon Valley Bank (SVB), Silvergate Bank, JpMorgan Chase & Co. (JPM), Bank of America (BAC), Credit Suisse Group (CS), or First Republic Bank (FRC).
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Best and Quickest Ways Out of This Banking Crisis
Income Mail by Bryan Perry
Rapid Transparency Can Quell Any Crisis of Confidence in the Banking Sector
Growth Mail by Gary Alexander
Beware The Ides of March (Part 2)
Global Mail by Ivan Martchev
QE Has Restarted
Sector Spotlight by Jason Bodner
What To Do When You See Red
View Full Archive
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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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