by Jason Bodner

March 31, 2020

Sentiment is weird. Individually, one person’s sentiment doesn’t have the same impact as when it gathers steam in a crowd. Imagine I fear witches. I might be labelled eccentric. But if the crowd thought the same way, things can get dangerous. It conjures the Salem Witch trials in 1692, which resulted in executions.

Individual sentiment can change rapidly when faced with an opposite crowd sentiment. For example: Rolling Stone magazine originally gave Nirvana’s “Nevermind” a 3-star rating in 1991. Now they give it 5 stars and rank it as the 17th greatest album of all time.

Kurt Cobain of Nirvana Image

Markets are collections of sentiments. Market crowd-think is very prevalent. In early February, the crowd was bullish, largely ignoring the virus. Most were optimistic about the economy, stocks, and our future. A few weeks and a coronavirus pandemic later, anyone I talk to is pessimistic about everything. The mood is dour: “People will die, our economy will never recover,” and it’s tough to find any silver lining.

I admit it; I’m nearly always a “glass is half-full guy.”  It’s unpopular now, but here’s my feeling: We’ll get through this, we’ll recover, and we’ll continue our centuries-long trend of progress. The market will make new highs. I am sure these things will happen; I just can’t say when.

When it comes to stock market analysis, I go strictly by data. I have no room for feelings: I use numbers.

Here’s what they tell me: The heavy selling is over, and the market has bottomed, near-term.

Last Sunday for the week prior (March 16-20), excluding ETFs, we had 22 buys and 2,555 sells – more than 116-to-1 sells. That was epic selling. This Sunday for last week, we had 12 buys and 520 sells (43-1 sells). While selling still dominated, the data implies that large-scale selling (liquidations) has passed us.

My conclusion: A bottom has likely formed.

Next, let’s look at the sectors. The previous Sunday’s report (March 22) saw all 11 sectors show an average 190% of their universe being sold. That means for every 100 stocks tracked in a sector, 190 were sold. Last week averaged just 40%, or 40 stocks per 100. It is also noteworthy that activity on Information Technology was “normal.” (Normal in the sense that signals were not at all extreme.)

MAP Signals Table

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

Energy and Consumer Discretionary also saw close to normal activity. When buying or selling in a sector is over 25%, the box turns yellow. Discretionary and energy were at 28%, just over the 25% threshold.

Now let’s look at the Big Money Index (BMI), which tracks unusual institutional trading, or big money moving in and out of stocks in an unusual way. Since 2012, the BMI has never broken 10%; meaning that the number of buys was never less than 10% of total signals on a rolling 25-day moving average.

Right now, we are at 9%. Since I began tracking this data, we’ve seldom been this oversold. That might seem like bad news but check this out: Only three previous periods in the last 30 years were this oversold:

  • Thursday, September 6, 1990
  • Wednesday, July 24, 2002
  • Thursday, October 23, 2008
  • Thursday, March 19, 2020

One thing pops out immediately: In 3 out of 4 times we went into extreme oversold, it happened on a Thursday. That might just be coincidence with so few data points, but it nevertheless pops out.

The deepest oversold reading the BMI ever logged was in 2008, in the Great Financial Crisis, when it plummeted to 3%. No one was buying hardly anything at all. As dire as that sounds, the BMI didn’t stay that low for very long. Within a couple of weeks, the BMI started to lift. That’s when we need to pay attention, because when the BMI starts to lift, historically market prices tend to fly higher thereafter.

But here’s the bottom line: A year later, markets averaged about 20% higher. Here is a summary:

Big Money Index Table

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

Finally, I want to look at last Friday March 27th. The major indexes closed down between -3% and -4%. Volume was high but not as high as prior big sell days. We saw 706 Big Money signals Friday. Those are stocks trading on above average volume according to Mapsignals. That is lighter volume in comparison to a recent -4% day that logged 1400 BM signals. To me, this means that despite total volume on the day, big money was far less active. It is just another data point that tells me a bottom has likely been put in.

I have spoken with several who think stocks could fall another 20%-40%, but I just don’t see it in the data.

Let me summarize:

We are EXTREMELY oversold. 98% of big buys and sells over the past five weeks have been SELLS.

  • 209 buy signals
  • 10,165 sell signals

Historically being this oversold doesn’t last long. When the BMI turns higher – great stocks tend to rise rapidly, like phoenixes.

I am not worried about retesting lows. When we get below 10% in the Big Money Index, it’s like holding pocket aces in poker. Sure, you can lose with that hand, but the odds say to push your chips in.

The market just dealt us aces for the coming year. Most are obsessed with nailing the market low. But if they were obsessed with where stocks will likely be in 12 months, they might make a lot of money.

The news is bad. It’s going to get worse. The mood is bad. It’s going to get worse. But in 1650 Thomas Fuller appears to be the first person to say that, “It is always darkest just before the day dawneth.”

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
The Fed Added $1 Trillion in March Alone

Sector Spotlight by Jason Bodner
Sentiment Still Stinks, but a Bottom Has Formed

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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