by Jason Bodner

March 28, 2023

When my family was in Phuket, Thailand on Boxing Day, 2004, the animals were long gone when the tsunami arrived. It was the day after Christmas of our long-awaited family vacation. The birds outside our room window were loud every morning, but that morning the birds were silent when the ground shook.

I recognized the feeling of an earthquake, but the silence of the birds was what haunted me. About an hour later, when the tsunami came, people went to see the water recede, not knowing that was a sign that killer waves were on the way. The animals knew that, and they were all long gone. How did they know?

It turns out that earthquakes can generate electromagnetic waves that animals can detect hours or even days before the actual event occurs. This phenomenon is known as the “earthquake lights,” or “seismic lightning.” It is still not fully understood by scientists in a way that can deliver an early warning to us.

Something like this would be a powerful weapon to have in the tool kit of investors who fear the “coming crash.” For those in the know, something like it exists, and it is every bit as powerful as one would think.

The Big Money Index (BMI) is a 25-day average of unusual buying versus selling of stocks. The BMI is measured in terms of buys – so the latest reading of 30.9 means that 30.9% of all signals over the past 25 days were buys. That number has been dropping since February 15th. Market timers would have seen the BMI falling from overbought on February 17th, signaling outflows of big professional investors.

Big Money Index Chart

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

It would be great to know when the BMI will reach oversold, as that usually indicates a strong reversion (buy) signal. Well, the data tell me that the 25-day average of buys and sells is 30 buys and 111 sells. If the averages carry forward that way, then April 5th is the likeliest day the BMI goes oversold.

Whether or not that happens, to the day, remains to be seen. The intensity of stock selling has waned significantly, as you can see in the red bars, while it’s still higher than average, moving closer to zero.

Big Money Stock-B-S Chart

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

Now we can see something interesting this time in the pattern of selling and buying: The sector strength is in tech, discretionary, and industrials stocks. Weakness is focused in financials, utilities, and real estate:

Sector Rank Table

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

This indicates demand for growth sectors, and a distaste for rate-sensitive sectors. Financials are seeing obvious weakness from the latest tumult in the industry – like bank runs due to a crisis of confidence from depositors. (More on that in a moment.) For now, in terms of selling, notice the resilience of tech and discretionary stocks and the headwinds of financials and real estate stocks:

Technology vs XLK Discretionary vs XLY

Industrials vs XLI Materials vs XLB

Staples vs XLP Energy vs XLE

Health Care vs XLV Communications vs XLC

Financials vs XLF Utilities vs XLU

Real Estate vs XLRE

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

As for last week’s market volatility, the FOMC decision to raise rates 0.25% came out, with mixed reactions: The market thought that if banks failed in a fragile system, that would pause hikes and even pave the way toward rate cuts. Goldman Sachs saw a zero percent probability for a 0.50% hike, 75% for 0.25%, and 25% for zero. What we got was a goldilocks 25 bps: not too hot and not too cold.

Powell’s positive statements were that the banking system is “strong, resilient, and well capitalized,” but his negative statements acknowledged sticky inflation and the Fed’s commitment to an inflation target rate of 2%. One hawkish comment was: “There are costs to getting inflation under control.”

The estimated terminal rate is now 5.1%, with the Fed target range now 4.75% to 5.00%. This indicates we are pretty much done, with perhaps one more hike of 25 bps.

Powell supports further bank regulation and supervisory changes to prevent further missteps. He also encourages outside independent investigations. This would encourage new procedures to strengthen banking reserves to ensure depositor liquidity. His main message was that bank depositors should feel confident. A reporter asked if all depositors are now insured: Powell seemed annoyed but said: We have the tools and are willing to use them when necessary, implying that depositors should feel confident.

What he wouldn’t say is when to expect any rate cuts.

Markets rallied on his comments and then rolled over on Yellen’s comments saying that the Treasury is not looking at insuring all deposits.

The truth is: Inflation is sticky, but interest rate tightening pushed long-end bonds down enough to cause a crisis of confidence in liquidity for failing banks. After reducing the balance sheet nearly $900 billion in nine months, the balance sheet swelled by $300 billion in a week due to guaranteeing depositor liquidity.

President Biden ensured that American taxpayers would bear no cost of backstopping deposits that banks failed to collateralize, but let’s be clear: Even if acquired or merged, banks will recoup the value of their failing securities over the long run. They will also likely increase fees (overdraft), which will invariably hit struggling lower income families. It may not hit the taxpayer, but it will certainly hit someone.

What it means for stocks is that rates are near a plateau. Investors want clarity as to when cuts will come. Powell acknowledged that committee members were unanimous in that they don’t foresee cuts in 2023.

Economies change based on momentum. During COVID, the government flooded the market with free money, stimulus, and liquidity – like an adrenaline shot. The economy awoke from certain death. But breaking addiction is hard and takes time. We are addicted and want more easy money. The problem is that the Fed wants 2% inflation, which fosters long-term growth like we saw the past 40 years or so.

But those decades included various crashes, the internet bust, 9/11, the Great Financial Crisis, and COVID-19. It wasn’t continual economic growth, and those stresses all saw central bank intervention. Rate hikes aren’t the only tools for restrictive policy. Tighter conditions can happen if banks are required to increase reserves from zero to any higher level. It also happens with tighter credit (tougher borrowing). The fed has many tools, and the goal is to ensure smooth, sustained economic strength.

Our path is clearer now. Powell reiterated the Fed’s data-dependence, but he also acknowledged that their models are linear, and the economy doesn’t work that way, “which is why we need to be data dependent.”

It’s like having kids: sometimes you need to give them restrictions, so that long-term they are equipped to deal with the realities of life. I view the Fed’s job in the same way, only they walk a tightrope.

Narrowly missing a full-blown banking confidence collapse by a weekend is too close for comfort. The Fed doesn’t want to further damage a fragile economy. I envision a last hike of 25 bps in the next meeting. I also expect data starting to reflect mediating inflation in persistent areas like shelter.

Either way, once rates plateau, technology and discretionary stocks should benefit. This is likely why they have been rallying for months now as we near the end of the hiking cycle.

The market tumbled because investors want less restrictive policy. And in Bizarro World, bank failures were “good news,” as they tend to make the Fed stop hiking.

The fed’s message was that times may still be tough, but let me close with this quote: “We are all faced with a series of great opportunities brilliantly disguised as impossible situations.” — Chuck Swindoll

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

Please see important disclosures below.

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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