by Jason Bodner
May 14, 2024
Why do I think the market is about to rally? I see it in the data – the unusual buying by Big Money, so a more appropriate question may be: “What is this ‘Unusual Buying’ and why does that matter to you?
More on that in a minute. First let’s talk about anomalies. In everyday life, anomalies catch our attention and cause us to wonder, sometimes even question our perceptions of reality. Take for instance, Namibian fairy circles that appear in the middle of the desert. Seen from above, they seem like polka dots on earth. Another fascinating anomaly is just outside Buffalo, where there is an eternal flame inside a waterfall.
There are countless other anomalies out there. But when it comes to markets, anomalies can happen well out of plain sight. To me, these market anomalies are more meaningful than anything.
OK, enough bizarre science mysteries. Now, why should you care about “unusual buying”?
Think of it this way: When a big institution trades stocks “abnormally” or “unusually,” we can formulate some expectations about what may happen in the future, since when a large institutional investor comes to buy stock, they don’t do it like you or me. They might take weeks to accumulate that stock.
Why do they do that? Well, it’s more why they must do it that way. Billion-dollar funds must invest large sums of money to take a meaningful position. Sometimes that takes time, in order not to disrupt the market. They don’t want to broadcast to the world what they are doing – so they try to accumulate as much volume as they can as quietly as they can. That means buying stock without disturbing the price too much. Trust me, as a former professional trader, I’ve seen them pay brokerage firms big bucks to do that.
But if they cover their tracks – how do we see those tracks?
That’s where the term “unusual buying” comes in, and that’s why it’s so crucial to identify the stocks that might rise significantly thereafter. In our world, unusual buying looks like these green bars:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Except for the green bars, the chart looks normal, but each green bar is like an x-ray showing us some “unusual buying” happening right here! Focus on how the price of the stock lifts as more green bars show up. This is why unusual institutional buying matters so much. Not only does it help indicate when a stock might zoom, but in the aggregate, it can give you hints at the future possible direction of the stock market.
This matters because I noticed unusual buying has returned. The past six days delivered significantly more buying than usual. There were six consecutive days in which buying outnumbered selling by 60% or more. In other words, out of 10 unusual volume signals, six or more were buys for six consecutive days.
In the chart below, we see the SPY ETF with green and red bars. (Green represents the aggregate unusual buying and selling on a particular day).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Out of thousands of stocks, only about 100 or so show unusual buy or sell signals on an average day. To ensure we are looking at meaningful data, the average daily count of all signals for the past six days is a healthy 143.7. This is substantially higher (69% higher) than the 34.5-year average of 85.1 per day.
In other words, this is real buying, not just a low volume bounce after a rough patch in April.
To contextualize what we are witnessing, I went back from 1990 until now, and looked at all the other times when we had six consecutive days of buying. Believe it or not, it’s fairly common, happening about 28% of the time. What we see in the table below is that it foreshadows strong forward market returns:
Source: MAPsignals.com, FactSet
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
What sets this time apart from those other previous 2,535 instances is that the buying appeared from a vacuum of buying. As you saw in the Big Money Stock Buys and Sells chart above, that green just started appearing from “nowhere,” from a prior period of little buying.
So, what does history tell us about similar times like that? The return profile is similar, but even better:
Source: MAPsignals.com, FactSet
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Interestingly, times that dragged down returns were not the Great Financial Crisis of 2008. Instead, it was 2000-2001 and 2022. Either way, six consecutive days of buying is bullish for stocks.
To add to the promise borne out by unusual buying, seasonality comes into play as well. In the chart below, we see the four major indexes in their performance average broken down by month. Notice that May and June are strong months, historically speaking. (Beware of the late summer months, however).
Source: MAPsignals.com, FactSet
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
To drill down further, according to our research, we are coming off a seasonally weaker short-term period:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
So, it looks as though stocks could possibly soar again, and soon. Now, we want to know where to find some leaders. Looking at sectors, we see continued strength in Energy, Industrials, and Financials:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Utilities have rallied parabolically in recent weeks. We see a ton of unusual accumulation in the Utility Sector:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I’d be careful here, as the recent narrative fueling the buying seems driven by the notion that AI demand will translate to immense demand for energy delivered by these Utility companies. It has the hallmarks of a trend that can quickly reverse. I prefer finding trends based on companies with solid fundamentals and institutional support. Looking back at the past six days, we see evenly distributed buying across sectors:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I’m seeing a lot of new names getting bought, but also a bunch of familiar high-quality names, too.
Anomalies in nature attract attention. Anomalies in the market can be hidden. Being able to see them when no one else does can deliver major insights. Ignoring them can leave our destiny unfulfilled.
As Shakespeare wrote in Julius Caesar, “It is not in the stars to hold our destiny but in ourselves.”
Navellier & Associates does not own ARES Management Corp (ARES) in managed accounts Jason Bodner does not own ARES Management Corp (ARES) personally.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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Sector Spotlight by Jason Bodner
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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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