by Jason Bodner

April 14, 2020

The year seems virtually over, and it’s only April.

I mean, we’re all stuck at home. I hear how people are eating like crazy and wine glasses are always full.

There’s nothing to do, right?

It’s our nature to seek distraction. Have you ever heard someone say, “If I’m not busy, then there’s too much room for thoughts to take over”? We’re all running from ourselves in some way, yet now we’re literally forced to stop and reflect, but many just can’t handle it and are going stir-crazy.

So it’s doubtful that anyone sees the rest of 2020 as “full of opportunity,” right? It seems near impossible, then, that we could one day look back at 2020 as “The Year of Wonders.”

But reflective go-getters might love quarantine. Such was the case for arguably the brightest scientist in history. In 1665, Isaac Newton was in his early 20s at Cambridge University when the Great Plague of London hit, eventually claiming 25% of that city’s population. Cambridge and other universities did the early version of distance learning, sending students away from campuses, “social-distancing” in the 1660s.

Newton suddenly found himself out of his prestigious school and stuck at home 60 miles away. With no Netflix to binge-watch, he did the next best thing: He altered human understanding forever.

  • He continued his Cambridge work and completed his original concepts that became calculus.
  • He messed around with prisms and developed his theories on optics and light.
  • Outside his window was an apple tree. Yeah that Historians debate whether an apple actually fell on his head or not, but it was there and then (in quarantine) that he birthed his theories of gravity and began the laws of motion.

Not bad for self-isolation time.

Got Bored - Invented Calculus Image

Naturally, I’m not suggesting everyone can go into a cocoon and emerge as a history-altering scientific genius. But, at bare minimum this should show what’s possible with some “free-time.”

I’m using the time to learn a new programming language and finishing some musical projects I’ve been “meaning to do.” But I’m most excited about collecting market data during the most volatile market since the Great Depression. What that data is saying is fascinating. It’s different from what the ugly news says: deaths mount, new cases slow but are still growing, and global economic shutdown is causing disastrous effects. Ray Dalio says we will see another Great Depression. (The news media love this kind of talk.)

I don’t see any comparison to the 1930s:

  1. The post-1929 stock market crash found the Fed raising interest rates. This 2020 crash finds short-term interest rates cut to effectively zero.
  2. Post-1929 there was no liquidity. The Fed reduced money supply. Today, Fed chair Powell just announced an additional $2.3 trillion of loans to provide liquidity to the U.S. economy.
  3. We are not alone; Europe and Asia are also pumping liquidity into the system.

So, we now have an extremely accommodative monetary policy – while the 1930s was tightening. The hoped-for V-shaped recovery looks more like it will be a U-shaped recovery. I see it playing out like this:

  • By May 15th, we will see the first signs of a reopening, largely for optics.
  • By June, we will have a functional “soft” opening.
  • By September, we will see signs of more “normal” economic activity
  • We will start to see growth in December
  • By March 2021 and forward, YOY comparisons will be the best of any point in history

Those are my thoughts. Most importantly, the data tell us that stocks have bottomed, while the bears still call for lower lows (see New York Times, April 10, 2020: “Everything is Awful. So Why is the Stock Market Booming?” In reality, as bad news peaks, the market typically emerges from its lows. Equities find a base. Volatility is coming back towards earth. The VIX (volatility index) peaked at 85.47 on March 16th and fell 50% to 41.67 on April 9th but we need another 50% VIX drop to 20 to feel ‘comfortable.’

The Big Money Index (BMI) agrees. That’s our index of unusual buying. When it is high, the buyers are in control. When it is low, sellers are in control. It bottomed at 9% on March 27 and it has since risen to 24.7% on April 9th. Remember, 25% and below is “oversold,” so we seem about to emerge from oversold territory. That’s a powerfully bullish indicator over Mapsignal’s 30-year data history.

Russell 2000 versus Net Stock Buys/Sells Chart

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

Map Signals Big Money Index Chart

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

It’s important to know that the BMI is not rising because of a bunch of buy signals. We have big volume on stocks going up, but they are not near technical levels high enough to make a buy signal. The index is rising because selling has evaporated. This makes sense as the biggest March fund liquidations are behind us. This means that the BMI can rise quickly even on low buy/sell signal counts.

All this means is that we just need to observe how the market behaves in the coming weeks. We want to see more stocks make buy signals, indicating the market is starting to price in a more controlled recovery. The data clearly says market lows are in, and once volatility dies down, outlier stocks reveal themselves.

I am 100% data driven. Emotion has betrayed me in the past, and sentiment often doesn’t correlate to the market outlook. In fact, the opposite is more likely true: The market cavern matches the fear summit.

As for what’s next, I think the worst case is that the S&P 500 pulls back by half of the rise from the low. Translation: worst case S&P at roughly 2550. I wouldn’t bet on us revisiting the low of 2192.

Data helps describe long-term models of reality. Emotion can cause major short-term dislocations. We know that happens, but it’s important to keep perspective. When it comes, find answers in data.

Sir Isaac Newton took the time he was given and saw opportunity dressed in tragedy and fear. He also knew that emotion could become logic’s enemy when he said: “I can calculate the motion of heavenly bodies, but not the madness of people.”

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

Please see important disclosures below.

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Never Short the Fed

Sector Spotlight by Jason Bodner
A Year to Create Something New and Valuable?

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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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