by Jason Bodner

May 16, 2023

A few years ago, I took my family to Key West, where we found one of coolest museums I’ve ever seen. In fact, it might just hold the key to the next bull market.

Mel Fisher was a chicken farmer from Indiana who had a deep passion for treasure hunting. He eventually moved to the seaside to pursue his dream of seeking shipwrecks. It didn’t go so well, for a long time… For decades he tried in vain – losing investors’ money and drawing harsh criticism. Nevertheless, he persisted, at great personal cost. He eventually lost his oldest son, daughter in-law, and a diver when their boat sank. But his persistence paid off. In 1975, Mel and his team discovered a Spanish Galleon called The Atocha. The shipwreck yielded 40 tons of gold and silver, including 114,000 Spanish silver coins known as “pieces of eight,” gold coins, emeralds, and 1,000 silver ingots. It was estimated to be worth $50 million then – or $2.5 billion today. It was also only half of the loot, the remainder still undiscovered.

There is plenty more to this fascinating story, but what resonated with me today is the concept of ballast.

These were usually stones, or sometimes precious metals or bars that would be placed at the bottom of the hull of a ship, as heavy metals lowered the center of gravity and stabilized the vessel to promote smoother sailing. Fisher’s team even discovered wrecks by identifying large piles of ballast stones nearby.

Without ballast, ships will flail around much more. Ballast is the great stabilizer of ships. Now largely replaced by water, ballast is used in the largest cruise ships and oil tankers at sea today. It is essential.

It’s also essential in markets, and it’s largely missing right now. The ballast of the market is simply sitting in “dry dock.” Last week I detailed the record amount of cash on the sidelines. According to the St. Louis Fed, $5.223 trillion dollars is sitting in money market funds. That is the highest amount on record, ever:

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

To me, that is the equivalent of witnessing an entire armada wobbling to and fro, because all of the ballast is sitting on the docks. Admirals wouldn’t send ships out like that, knowing that main support is needed.

Investors can’t expect a low volatility stock market without the anchor support of cash being infused. And that’s a key issue right now. Negative media and sentiment still pushed record levels of cash off to the sideline. But despite that, equity markets started rallying from October lows, when we least expected it. That’s often how it goes with stock market bottoms, but there’s also a quantitative explanation…

The Big Money Index (BMI) measures unusual institutional money flows in and out of stocks. When it goes into oversold territory, history suggests higher prices will follow. The BMI doesn’t listen to news reports or get emotional, and in October it signaled a market bottom had arrived:

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

There was no “all clear” signal from the mainstream media for investors to jump back in and time the market perfectly. There never is – it’s always hindsight that identifies market lows. It was, however, nice confirmation for those who use the BMI as a market pivot indicator, because many major and minor indexes have rallied immensely since last October 12, led by those inside the blue circles, below:

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

The rally was led by both growth and value. Sectors rallied broadly, except energy, the shining star of 2022 – a year when all other sectors flailed around. Tech was strong, particularly semiconductors.

But since April ended, the market feels annoying. Things aren’t going up the way you and I want them to. Even though earnings are working. Cautious guidance is holding the market back as sellers punish shares, seemingly unfairly. But those are mostly our emotions, which have no place in investing, in my opinion.

Let the data guide us here. Look at the seasonal cycles again. October through April is the seasonally strongest time of year since 1990, with November as the top performer, followed by December and April.

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

This also means that May through September can be annoying.

Couple this with no market ballast, and we will likely see a rocky summer. But that’s exactly when quant-driven stock picking is crucial. When markets are bullish, returns are relatively easy to come by. We got spoiled by that phenomenon, even expecting it. But when there’s no clear trend and volatility is higher than usual, that’s when a stock picker is worth their weight in gold (or emeralds, or pieces of eight).

Once ballast returns and cash flows into equities, there will be smiles again. But for that to happen, recession fears must subside. There is record cash on the sidelines because uncertainty equates to fear of loss. No one wants to lose money. I certainly don’t. But the patience required to feel safe and invest almost always means missing out on a huge chunk of gains.

Let me illustrate:

Hypothetically, Investor A (a perfect investor who hits the market low exactly) bought SPY on October 12th at a closing price of 353.54. Yesterday’s close was 412.13 representing a 16.6% difference. Assume sometime in the fall investor B finally feels safe to dip a foot in the water – but SPY rallied another 10% to 453.34. To continue our silly example, assume we rally to the moon and one year from now the SPY is 25% higher from there, and it closes at 566.68. Happy Days! Investor B is now sitting on a nice whopper of a +25% return. But perfect investor A is sitting on a +60.3% return… 2.4 times investor B!

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

Henry Kissinger, who turns 100 later this month, said: “If you don’t know where you’re going, every road leads to nowhere.” Investing by emotion (in this case, waiting to “feel sale”) can feel better but it can really affect performance. Using data to guide decisions might pay off when all is said and done. That is why I covet a quantitative non-emotional approach to investing to show us where we are likely headed.

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
Real-Time Inflation Indicators are Quite Weak

Sector Spotlight by Jason Bodner
To Find Big Treasures, You May Need Ballast

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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Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.

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