by Jason Bodner

April 28, 2020

I ran into a friend yesterday. After discussing family and corona-life, we talked about the economy and the market. We agreed that media comparisons to the 1930s Great Depression were not justified.

Here are some key differences between then and now:

  • In the 1930s, roughly 11,000 banks failed. Milton Friedman argued that the 1929 market crash didn’t cause the Depression. He felt the banking collapse was caused by the public making runs on banks.
  • The 25% unemployment rate during the Great Depression may not compare with the COVID-19 crisis. Today, the typical household has two earners as opposed to one main breadwinner then.
  • The Hawley-Smoot Tariff Act of 1930 increased U.S. tariffs. That decreased international trade (especially farming), which helped spread the Great Depression worldwide. Today we have an immensely accommodative monetary policy, low interest rates, and a flood of liquidity.

When it came to stocks, he said the massive rally from the March lows has been a “dead cat bounce.”

I said: “That’s an awfully big bounce. To bounce back, we’d have fall to 2200 on the S&P 500!”

He gave me the Duh look, as in: “Well, yeah!”

“Well, yeah!” Image

I said that, while possible, my data didn’t see that outcome. I mentioned how my data called the market low on March 20th (missing by a day) and predicted a massive rally. Then I said my BMI is still rising.

The Big Money Index (BMI) is a very accurate market timing indicator, but like all things, it is not perfect. The BMI adds up all big money buy and sell signals and creates a 25-day moving average. If it is over 50%, buyers are in control. Over 80%, buying is unsustainable. Under 25%, selling is unsustainable.

On March 18th, the BMI dropped below 25% to oversold. This is when I said, “Get ready for a big bounce.” The market did indeed bounce higher, and so did the BMI – all the way up to 60%!

The bounce is not due to too many buy signals. In fact, the big buying and selling counts basically just vanished, like a vacuum suck. Remember the 1991 movie Backdraft? Fire burns then suddenly disappears into a vacuum. Then Kaboom! It was gathering energy for the next big pop!  The same happened in the 2004 tsunami. The water receded from the shore, getting sucked out to sea. Then the tsunami came.

The “Buying Vacuum” Study

Here we are with big money activity sucked away to nearly nothing, so what can we expect to come next?

Is this just a dead-cat bounce? Are we headed back to oblivion? Or will there be sunny skies ahead?

To find the possible answer, I looked back at 30 years of my stock data. On over 7,635 trading days, I found that each day averages 80 signals of unusual institutional trading, 46 buys and 34 sells. These buys and sells come from a larger stock pool showing big money trades. Buys or sells happen when high or low prices are violated. Average daily big money trades since 1990 are 273. That number has been rising due to ETFs and increasing trading volume. For example, since 2005 daily big money trades average 445.

Big Money trading is a way of seeing when something big and weird is going on in otherwise “normal” stocks. From the 5,500 stocks we monitor, around 1,400 can be traded by big money accounts without creating a big price impact on them. For context, average daily big money trades for the six months from September 2019 through February 2020 was 610 per day. The average for March was 1290 – more than double. Nearly all (92%) of big money stocks traded in a huge way during March.

Once we troughed, the backdraft came. Volumes and signals were basically sucked away. Average daily big money trades for April fell from 1290 to 380, barely half normal. I summarize all this in a table:

Big Money Activity Table

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

So now we know that big money trades and signals have plummeted. What should we expect now?

To get an idea, let’s next look at a moving average of signals. That way we can know if we are trending up or down. We can identify how far away we are from the average, and then see if the market is trending up or down. This way we can compare to prior times in the past 30 years.

Currently, the 20-day average of Big Money trades is trending down. Friday saw big money trades at 50% of the average, up from 29% on April 15, but for 20 days, it’s down while the market is trending up.

I went back to see a time just like this: A vacuum of Big Money trades and signals, with an up-trending market. Out of 7,635 possible days, there were 127 instances like now, or 1.7% of the time – so it’s rare.

What can we expect? While it’s hard to expect much higher prices after a nearly 30% rally from recent lows, here’s what we see: This data says that when everything is this quiet, we can expect higher prices.

The forward returns for the S&P are summarized below:

Standard and Poor's 500 Forward Returns Chart

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

So, despite a BMI racing to 60%, low signal counts aren’t necessarily bad. It indicates a market resetting and finding firmer footing. Health Care is clearly leading the way right now. I am monitoring the sector to see if it goes into overbought territory, but this week saw 21% of the Health universe show buy signals.

MAP Signals Table

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

For now, quality stocks are taking over from the short-covering rally. Leaders will emerge and light the way as the market expects an economic restart, perhaps sooner than the overall sentiment does.

Emotion can let our fears and hopes wander as far as they like, but the story is in the data. Gustave Flaubert (1821-1880) said “Le bon Dieu est dans le detail.” Meaning “God is in the details.” It later morphed into: “The Devil is in the details.”  Either way, it is clear: Everything is in the details.

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
It’s Often Darkest Before the Dawn

Sector Spotlight by Jason Bodner
What’s Next: Bounce or Bust?

View Full Archive
Read Past Issues Here

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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