by Jason Bodner

April 18, 2023

You might imagine that while I work, CNBC is blaring in the background, along with flickering digital ticker tape flying by on several other screens. Well, that’s my history: I spent nearly 15 years on trading desks in that exact scenario, with added screaming on phones and frenetic trading all day long, so when I struck out on my own, one would think I tried to replicate that environment. But not so: I don’t watch the news. My current environment is a large, spacious, quiet room, with “chill” music, and two dozing dogs.

My workday more closely resembles a quiet, cool hotel lounge than a trading desk. It allows me to think creatively and analyze data without the influence or noise of endless opinions and the posturing biases of the media. Instead of Cramer, I am currently listening to some smooth soul of The Fabulous Three.

News, of course, serves to inform us, but at least 80% of it depends on ads. It is designed to sell products for advertisers. That’s why I am leery of much of what they produce. After all, if we based our decisions on news stories, we might never leave our house again. And if we were lucky enough to live another day, we might worry about the destruction of our planet and the end of life as we know it within a year or two.

So, should we invest the way they tell us – being constantly influenced by emotional stories of fear and greed impacting stock prices? To do so would be to think that business values fluctuate wildly day to day. That is crazy, if you think about it, but wild news stories and rumors push stock prices up and down daily.

I suppose many of you reading this are business owners yourselves. Imagine if your dry-cleaning business were worth $1 million on Tuesday, but on Wednesday a news story came out bashing the environmental impact of the dry-cleaning industry and now your business is worth $800,000. But Thursday rolls around and a puff piece about green-dry-cleaning jacks up the new price of your business to $1.1 million.

It’s nonsense, right? But I just described most stocks and sectors, from time to time, in the stock market. Volatility is a trader’s lifeblood. Prices move around wildly, so profits can potentially be captured. But that’s not where the real money is. As Jesse Livermore put it a century ago, the real money is “in the sitting.” That means buying great businesses at good prices and holding them for a reasonable time as a proven method of investing. Perhaps the buy-and-hold “forever” days are dead, at least for now, but you can’t make money on a stock you own without holding it at least for some reasonable amount of time.

If we can’t rely on news to drive our decisions, then what do we do?  Well, by now you know that I rely on data. And while the news is giving us conflicting stories about inflation, interest rates, wars, disease, politics, and other distractions, the market is giving us signs right now of what’s likely to come.

First let’s look at the Big Money Index (BMI). Its drop was halted just above “oversold,” and it has since been rising steadily. What’s interesting is what MAPsignals’ Alec Young pointed out last week, in his analysis of the BMI, when he wrote: “Don’t Rule Out New Highs.”  As it tracks trends of money flows, BMI readings of 80+ are “overbought” and we can expect a pullback. But when the BMI drops below 25, we are oversold. “That’s when the baby’s being thrown out with the bathwater and stocks are a big time buy.”  Right now, since bouncing off just above oversold, the BMI forecasts more upside than downside:

Big Money Index Chart

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

This is mainly due to the evaporation of heavy selling, caused in no small part by the banking collapses and fear of contagion. And that’s making way for some light but intensifying buy signals:

Big Money Buys-Sells Chart

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

And that recent buying has been focused heavily in small- and mid-cap stocks.

Big Money Market Cap Chart

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

That’s a healthy sign. If there were true fears from investors about a catastrophic recession, would they be gobbling up small businesses? What’s even more promising is that the sector leadership has a strong growth component. Look at the highest-ranked sectors, which are now tech and discretionary:

Sector Rank Table

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

The laggards continue to be the financials, due to the banking woes, and real estate, due to interest rates. As rates will likely come down next year, I wouldn’t write off real estate for dead. And banks always find a way to survive, as evidenced by the latest lifelines extended to the banks and their depositors.

Now, as we turn to the breadth of individual sectors, we see a common theme: selling is dissipating and giving way to some buying. The intense red (selling) was focused heavily on most sectors except tech and discretionary. Energy and health care’s recent recoveries undid much of the damage done near the Ides of March. Perhaps even more interesting is the fact that buying is beginning to sprout in every sector, except for poor real estate. Perhaps it is there that value seekers might look for deals on great businesses getting punished along with the overall sector. PCH, IIPR, PSA are names that warrant further study in this area.

Technology vs XLK Discretionary vs XLY

Materials vs XLB Energy vs XLE

Industrials vs XLI Staples vs XLP

Utilities vs XLU Health Care vs XLV

Communications vs XLC Financials vs XLF

Real Estate vs XLRE

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

I know I harp on this theme often – the demonization of the news – but it’s a central theme to my view on investing and life in general: Seek objectivity. Decisions based on emotions may have served us well as human primates. Instinct kept us alive. But now, in a more analytical world, we must adopt a data-driven approach. And investing certainly should be based on data analysis, with little input from our emotions.

Remember that Jesse Livermore quote: “Money is made by sitting, not trading.”

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

Please see important disclosures below.

About The Author

Jason Bodner

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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