by Jason Bodner
April 23, 2024
Weeks ago, an earthquake hit the New York City area. It prompted some shock waves, but shouldn’t have done so … the U.S. Geological Survey estimates that 500,000 earthquakes happen every year. Many are deep within the Earth’s crust and go undetected without seismographs. Humans can feel only 20% of the world’s earthquakes. Only around 100 per year cause any significant damage.
When the news of the New York quake hit, the stock market responded with a nice rally! The real market quake hit a day earlier, when a hotter-than-expected jobs report came out. That meant a delay in rate cuts. The economic aftershocks have been fairly severe. The S&P 500 ETF (SPY) has fallen ever since then:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The market feels bad, but to put things in context, we simply returned to levels last seen around February 21st, which is still up 22% from October 2023. So maybe we shouldn’t fret over a much-needed pullback.
Or should we? A week ago, I would have said “don’t worry.” Now, I’m not so sure, at least for the near-term. Longer term, and for the rest of the year and beyond, I am still bullish. But the recent backdrop over renewed rate-cut anxiety has tipped some scales… and not for the good of a sustained rally.
Let’s dig into some things we need to know… First, the Big Money Index (BMI) cut sharply through its support, which started in early February. For a long while, it traded in a tight range between 70 and 74 — until April 11th, that is, when it broke below 70, and it’s been falling hard (to near 50) ever since then.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I have been saying for weeks that the important thing is when the BMI falls from overbought. It did that in December, but the market kept rising. The BMI was falling due to a drop-off in buying, not an increase in selling, but things have changed in the last week, and quickly. The risk takers clearly had a change of heart since the last jobs report and CPI came out. For the first time in a long time, unusual selling has picked up. In fact, we are seeing the highest selling since the October lows in both stocks and ETFs:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This becomes perfectly clear when we look at last week’s distribution of selling versus buying. On the left you will see last week’s unusual buy and sell signals for stocks. The first thing we notice is that, excluding Friday, there were 411 sell signals over four days. For context, it took 13 trading days, or nearly three weeks, to accumulate that many sell signals prior to last Monday, Tax Day, April 15.
Looking at it another way, the daily average of sell signals for April 15-18 was 105. In contrast, the daily average since November 1st was 27. The chart on the right shows how starkly last week’s signals differ:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I have also been praising the market’s underlying resilience. What I mean is that the individual sectors have been strong despite a sagging BMI. But last week, the tenor changed visibly. Not only are we seeing all sector charts breaking down, but we are also seeing signs of selling. Many sectors had virtually no selling to speak of since November. Now, the picture is changing:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is also affecting the sector strength and weakness table. Technology was making a comeback, but suddenly it slipped back down to number 5 on the list:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We are seeing some other signs of fear and caution. Interest rates have spiked. The 10-year rate poked above highs not seen since November:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Middle East tensions are flaring. Wars are raging. The political landscape is heating up. We have an election coming soon. It feels like things are bubbling to the brim and it’s hard to find a glimmer of hope. It’s hard to remember that we are still only a few percentage points from the all-time highs for stocks.
So, I’ve laid out a pretty compelling case for the bears. But should we worry about all this stuff?
The short answer is … maybe, but ultimately not. Global issues will always dominate the headlines as long as we are fallible human beings. Stocks, however, seem to keep rising… at least for the last 100 years, so before we get our bear suits on, I want to offer some context for why we shouldn’t freak out.
In fact, the data still says the opposite. If history repeats itself, there is a big opportunity on the horizon.
Something new and interesting happened in the last week. Both the BMI and the SPY (S&P 500 ETF) fell for five consecutive days in tandem. It may seem like that would happen fairly often, but in fact, the opposite is true. MAPsignals has data going back to January 1st, 1990. That is nearly 34.5 years, or 8,614 trading days. I searched for all the times where both the SPY and BMI fell together for 5 straight days or more. There were only 39 instances when that happened or 0.5% of the time (and many dates overlap).
In other words, 99.5% of the time we don’t see five straight down days in both the BMI and the SPY.
So, what happens after these ultra-rare convergences? Well, I’m glad you asked! Below, the table shows each date as well as the successive returns of the SPY 1, 3, 6, 9, 12, and 24 months later. The results are nothing short of awesome. They were also higher a stunning 80% of the time on average:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Here is the full table:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
So, the data tells us we should not freak out. We need to ride through some volatility that we have long said is overdue. More importantly, we should be eyeballing quality stocks that may go on forced sale.
Capitulation may be near, or it may take a while to play out. But in any case, this super-rare signal says we should start to get greedy when others are fearful. Remember, fear will always be part of the game.
Or, in the words of George Adair: “Everything you’ve ever wanted is on the other side of fear.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Mixed Earnings Reports Send Stocks Spinning
Income Mail by Bryan Perry
Will Earnings Season Be a Salve to a Wounded Market?
Growth Mail by Gary Alexander
Time for Some Spring (Tech Stock?) House Cleaning?
Global Mail by Ivan Martchev
It Looks Like Some Middle East Missiles are Pure Theater
Sector Spotlight by Jason Bodner
The Big Money Index Finally Sees Some Selling
View Full Archive
Read Past Issues Here
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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