by Jason Bodner
March 7, 2023
Sometimes new approaches change the game. Other times skeptics create hurdles. The story of the Tucker ‘48 comes to mind. It was the “car of the future,’ which captured the public eye. Tucker was a pioneer for safety and engineering. The Tucker had a rear engine with rear-wheel drive. Its headlights turned with the front wheels. Both features already existed, but the Tucker had them first for American production cars.
Unfortunately, an SEC investigation and negative press forced the company into bankruptcy and an early demise, but the car and its creator were immortalized in a Francis Ford Coppola movie called “Tucker.”
When the iPod came out, some questioned it. Soon, you couldn’t find a person without one. It was a smash hit, which paved the way for the iPhone, but Microsoft launched their “Zune,” which was a dud.
What makes one innovative approach a flop, and another similar one a smash hit? Clever marketing helps: Steve Jobs in his iconic black turtleneck holding an iPod touting thousands of songs comes to mind. I’m no marketing wiz, but I use a unique approach to looking at markets. It’s proven remarkably reliable in identifying a multitude of opportunities that are not always clear in other market methods.
Since I’m no marketing wiz, I’ll just give you the clear rundown, since right now is a rare time when most of the ways we use it exist concurrently. The current environment, data, and insights can offer anyone a unique glimpse into how the average investor can benefit from this data-driven look at stocks.
Let’s start from the top: the Big Money Index (BMI) is a 25-day moving average of all unusual buying and selling. We take all unusually large stock and ETF buy and sell signals and net them for 25 days. The result is a number: Last Friday’s was 65.7%, meaning 65.7% of all signals in the past 25 days were buys.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As that number drops, the market usually follows suit. The BMI then becomes most meaningful when it drops below 25% (“oversold”), which indicates that selling is unsustainable, and a bounce is near.
On the upside, over 80% buying is “overbought,” which indicates that markets will likely weaken in the future. The BMI went overbought about four weeks ago, on February 8th and it only stayed overbought for 7 days. The market has weakened ever since. The BMI has been falling, but if buying suddenly picks up, we can expect it to reverse higher – indicating that buyers have taken control. The BMI is a great indicator for market pivot points, with a strong history of overbought and oversold detection since 1990.
How do we know if buying is ticking up? We can look towards the aggregated signals each day.
In the chart below, we see all stock and ETF buys and sells on a given day over the last six months. It’s not hard to see a correlation between buying pushing prices up and selling pushing prices down. But we also see how extreme selling correlates with lows and extreme buying correlates to blow-off tops:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Same Logic Applies to All 11 S&P 500 Sectors
We can extend this same line of thinking down through each of the 11 S&P 500 sector classifications.
What you will notice in the 11 sector charts below is that nearly every sector was heavily for sale in late September/early October. Naturally, that correlates with the overall market pressure we see above at the same time. But look again at how selling became unsustainable in the overall market, and the sectors reversed higher just after the selling hit fever-pitch levels. And if you revisit the BMI chart above, you will see that it hit oversold in September and October and then we saw a monstrous rally.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, we can extend this thinking beyond overall market correlation. Within each sector, there exists from time to time that sector’s own reversion signal that is not market dependent. For instance, have a look at Utilities (the final chart above): Selling is getting out of hand. It’s unsustainable. That’s great news for the contrarian market timers, as buying into extreme weakness may yield a solid long-term return. The trend followers, however, are more interested in selling when the selling just starts and prices pierce below a level – say, some sort of moving average. They would buy only after a new uptrend begins or intensifies.
Similarly, Health Care stocks have seen some heavy selling, which looks to be nearing unsustainable levels. So long-term deal seekers may find interesting levels on health stocks with superior fundamentals.
For those who trade with the trend, Materials and Industrial stocks are seeing solid buying and up-trends that buck the overall market trend. Identifying stocks with strong sales and earnings growth, profits, and sustainable diverse business models in those sectors would be right for those looking to ride those waves.
For trend seekers looking for pullback opportunities (depending on what period you define as “pullback”) – I would invite you to examine Discretionary and Technology stocks. Those sectors have seen seriously strong buying since mid-October. February brought about the a welcome pause, as buying diminished significantly after the big early February spikes. (Keep in mind that tech and discretionary stocks were among the most hated groups in 2022, so even though they rose in Q4, there is much ground to gain still.)
Here is the sector rank for last week – notice the strong groups I just discussed are top-ranked, while utilities are still in the basement:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
So, there you have it – my mini-primer on how this methodology can potentially produce different results for different investors using the same data.
New approaches can shock the world. One can succeed, like the iPod, or fail spectacularly like Tucker, or just fly under the radar. In any case, new approaches can be useful for those who embrace them. Fearing new things is natural. But as my old Bloomberg header used to say, “Feel the fear and do it anyway.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Reviewing “Our Big Energy Bet” (As Spring Approaches)
Income Mail by Bryan Perry
The Market Defies Inflation’s Revival (and Runaway Deficit Spending)
Growth Mail by Gary Alexander
Which Nation Will Prevail – China or the U.S.?
Global Mail by Ivan Martchev
M2 Money Supply Shrinkage Accelerates
Sector Spotlight by Jason Bodner
A Short Course in Market Timing and Sector Selection
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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Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.
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