by Jason Bodner

May 19, 2020

Where there’s a will, there’s a way.

Here’s an example: In the 1980s, there were few German princesses left. One of the last, Princess Marie Auguste of Anhalt, was in trouble: she was broke. She was so broke that she started a business adopting adult men. That gave them the royal title of ‘Prince.’ They would pay for this service, of course. This way about 35 regular dudes became ‘princes’ and in the process, she made millions.

Princess Marie August Image

Leasing royal titles aside, many look at this market and must be thinking the market is willing itself higher. It should be no secret that the market is a forward pricing mechanism. The current more-than-30% rise from the March 23 lows is forecasting a swifter recovery than the media anticipated. Whether or not the market is accurate remains to be seen. But one thing should be clear by now: The market movements and media headlines are decorrelated more often than not. It’s the human deep-seeded desire for reasons and “stories” to explain outcomes that drives our need to know “why” the market is doing what it is.

We need a story… most of us can’t just accept the way things are.

I remember frustrating the heck out of people in an exchange like this:

Person: “Why is the market going up?”

Me: “Because it’s going up.”

Man, that annoyed them, but the truth is hard to accept: there isn’t always an immediate reason why.

In fact, most of the time the reason only comes clear after the move.

So if we can stop trying to know in our bones why the market goes up or down, maybe we can just look at what the market does historically for an idea of what it will likely do in the future. That way we can sit back and nod our heads in a quiet “aha” moment having been positioned correctly before knowing why.

It is counterintuitive, I admit. Especially when talking about risking money. It’s like asking you to sit at the poker table and giving you some chips, only you don’t know the rules of the game or how to play. You just follow instructions that say: “When you receive two aces, you have an 81% chance of winning the hand, therefore bet about 80% of your chips.” With a hefty stack of chips, you’d be happy finding out why later, as opposed to being infatuated with knowing why before you bet.

And so it goes right now with the market. Several people reached out to me last week. They were so certain that the market would crack, they initiated short positions. Now, they wanted to know the moment it would turn. Who knows? Indeed, the S&P 500 Index did finish -2.3% lower for the week, but not without staging a +3.3% rally from Thursday morning lows, but still near 3-month highs… But why?!

Bankruptcies are on the rise. Airline travel is down 95%. Unemployment is monstrous. Restaurants are getting read their last rites. Reopening is being met with skepticism and reluctance. Schools remain shut, summer plans are total question marks, and leisure travel is the stuff of dreams for next year… maybe.

The world sucks right now, but the market is going up… why???

Here’s why: Because it’s going up.

The real question to ask is: “What will the market likely do next?”

My advice? Resign yourself to revisit that question and find out why later.

The best way to see the future is to look at history. What does the data say for situations like this? To find out the answer, first ask what “this” is: What is the current situation?

When markets trend along, it’s important to know the leading sectors and lagging ones. Right now, the story hasn’t really changed. Tech and heath care still lead, while energy, utilities, and real estate lag.

Map Signals Sector Rankings Table

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

There are plenty of reasons why that is. Health care stocks are seeing an obvious bump due to increased health needs and demands of the pandemic. Cloud life is exploding with stay-at-home orders persisting. The endlessly increasing reliance on technology is being accelerated for practical reasons. Energy prices continue to be low and volatile. Consumer discretionary stocks are not looked on favorably as especially dismal retail sales numbers were released last week.

Sectors help in smoother markets, but when markets are volatile, like this year, we must pay closer attention to the overall picture. Are we oversold or overbought?  In early March, the data looked to be headed towards being oversold. I came out and said the market should trough on March 20th. I did this by looking back over 30 years of data and providing a predictive framework. The market actually troughed one trading day later, on Monday, March 23rd. The S&P 500 vaulted more than +31% from there.

Now the Big Money Index (BMI) says we are firmly overbought (over 80%) and sits above 90%. So, I did the same thing. I looked back at all the overbought instances since 1990. The Mapsignals BMI was overbought for 1403 trading days out of 7650 observances (18.3% of the time). This was spread across 67 periods. The longest overbought period was 99 calendar days (68 trading days). The shortest was one day. The average forward returns for the market were mediocre but positive. That means adding risk when overbought doesn’t provide nearly the asymmetric payout potential as doing it when oversold.

Standard and Poor's 500 Average Return Table

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

The key is to see when the data shifts (i.e., the BMI starts falling) in order to determine possible market reversal points. We want to know that money is coming out of stocks, even if the indexes are rising. I have said we could stay overbought for a while now. Remember, the maximum period of being overbought in history was well over three months (99 days). These are the four longest periods:

Standard and Poor's 500 Longest Overbought Periods Table

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

The data says that “because we’re overbought doesn’t mean lower prices.” The market is telling us “never mind the reasons; where there’s a will, there’s a way.” It’s been that way for a long time. George Herbert first said this as one of his Outlandish Proverbs in 1640: “To him that will, ways are not wanting.”

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Deflation is Spreading

Income Mail by Bryan Perry
Here’s Hoping the Reopening Goes According to Plan

Growth Mail by Gary Alexander
This Market Recovery is Justified by History

Global Mail by Ivan Martchev
The Banks Are Likely to Take Out their March Lows

Sector Spotlight by Jason Bodner
Just What Does “Overbought” Mean?

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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