by Jason Bodner
April 30, 2024
Pressure cookers have been around since 1679. The theory is that increased pressure raises cooking temperatures more than normal atmospheric pressures. This results in much more efficient cooking. But if the pressure is not safely vented… KABOOM! Rare as it is, they can explode, causing serious harm. However, if the pressure is periodically released in small amounts, everything runs smoothly.
Tax season always feels like a pressure cooker for me. I feel squeezed to gather all those detailed documents, count all the beans, and remember things for multiple businesses and people in my household. It culminates at deadline day, and just like that – the pressure valve is released.
Another big pressure valve in April was the stock market finally selling off. The much-awaited selloff was swift. Spawned by hot inflation likely to make the Fed more hawkish, it felt uncomfortable at the time.
Looked at unemotionally however, markets were very overdue for a normal pullback, which really started closer to April Fool’s Day than Tax Day. The pressure cooker released some healthy steam. If there were no such release and stocks just kept flying higher, inevitably the market would crash and cause much more serious damage… KABOOM! The action we saw was a natural and necessary release of pressure.
But it’s also natural to wonder what comes next, and how long we should expect this leakage to last.
For my longtime readers, you know that I don’t rely on my emotions for investing guidance. They have failed me time and time again. What hasn’t failed me is the cold, hard data. And that’s the lens I look through to see the market for what it really is, at any given time.
First, let’s assess the state of the market and survey where the money is flowing. Then, we will look at some historical context for earnings, seasonality, and a climate similar to today. So… let’s dig in!
First, let’s look at the state of unusual buying by large professional investors, which I call Big Money. The selling that rocked the market for the first two weeks of April has subsided. We are also starting to see some small buying. It’s important to note that the way our data works, this can’t be the same stocks. To get a sell signal, stocks must slice below their roughly 11-week low on huge volume. To get a buy, the price has to surge above an 11-week high with big volume. So, the stocks sold in early April are not the same ones getting bought now. ETFs were also sold in early April, but we are not seeing buying just yet:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
To track down the money flows, let’s look at the selling of early April compared to this past week. The first two weeks of April saw significant selling (left chart, below, 697 sold stocks). Health Care and Technology accounted for half of the selling. Compare that to the first four days of last week (right chart). We saw far less selling and, in fact, more balanced buying versus selling. Buying however, was in Energy, Financials, Industrials, and Staples. Selling continued, albeit at a slower pace, in Discretionary and Health Care.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Tracking the money flows from when the bull market was strongest is a good comparison to now.
Below we see very clear pictures of sector rotation from 2023 year-end to now. Tech and Discretionary were dethroned by Energy and Financials, with Staples also climbing in the ranks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It always helps to visualize money flows. Here we see individual sectors. Notice the drop-off of buying in most sectors except Energy, Financials, and Utilities. Selling was biggest in Health care. Staples saw some selling but a quick snap back to buying (different stocks within the sector), flipping from early to late April. Tech continues to drag. Bellwether earnings were mixed, with some of the former Magnificent 7 stocks with disappointing guidance after beating in sales and earnings, while others had strong reports.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Seasonality says volatility is a few weeks early but mostly on schedule. May and June are seasonally less strong than other months. August and September are when we expect the most volatility… that’s for later!
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
But don’t just “sell in May and go away.” We can’t skip over June or July. According to our study, May 20th is when things should kickoff:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Remember, too, that we are right in the middle of earnings season. Historically, sales and earnings “beats” are quite common about now. Here are the S&P 500 stocks broken down by historical positive surprises:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
So far, Q1 reporting is right in line. As of April 26th, with 46% of S&P 500 companies reporting results, 77% beat EPS estimates and 60% beat revenue estimates. My prediction for Q1 earnings on April 14th was that 79% of companies will beat earnings estimates and 67% will beat sales estimates. The sample size so far is almost at the half-way mark, but I’m pretty close to target on earnings surprises.
Finally, the Big Money Index (BMI) fell from overbought in February. Normally that prefaces weaker price action. Only that didn’t happen; instead, we saw continued strength. The market started softening on April 1st, but the BMI didn’t slice below its trend line until April 11th. Then it cratered.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The question is: “Where does it go from here?”
Once again, to hypothesize the future, we look to the past. The BMI hit its overbought peak of 91.3 on December 29th, 2023. Since then, it has fallen 40.7 to last Friday’s reading of 50.6. I went back to 1993 (when SPY started trading) to look at similar setups. There were a total of 303 times prior to this one when the BMI fell 40 points or more. There were six times that mirrored almost exactly this time: a fall from roughly 90 to roughly 50. The forward returns were shockingly good for long-term gains from there:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Simply put, volatility is here, but that’s normal. History says we will not only be fine, we will likely do great. I like that narrative. Now is a great time to identify great stocks going on potential sale. Instead of worrying about the future, let’s embrace it. It was Horace who said: “Seize the day” (“Carpe Diem!”)
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Perils of Owning the Wrong Tech Stocks
Income Mail by Bryan Perry
Three Percent Inflation Looks Like “The New Normal”
Growth Mail by Gary Alexander
Slower GDP Growth Surprised Analysts (But Not Us)
Global Mail by Ivan Martchev
The Case of the Disappearing Rate Cuts
Sector Spotlight by Jason Bodner
Selling is a Bull Market’s “Pressure Release Valve”
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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