by Jason Bodner

June 1, 2022

Contrary to popular belief, lightning will strike twice – and even more – in the same place, or even the same person. Just ask Roy Sullivan, who was struck seven times and survived them all.

Well lightning just struck the stock market in “the same place” again, and it’s one of the rarest events we can witness in the stock market. But it’s historically wildly bullish. It’s an “oversold” condition.

It hasn’t happened in over two years. The last time it happened, the S&P 500 rose 50% in 12 months.

The stock market has seen huge selling in 2022, especially in early May, the month now ending, May. But there are periods when outsized selling gets to be extreme and unsustainable. When that happens, markets get oversold, and we expect a big snapback rally. Last week, I discussed why so many big investors are selling recently. It was forced sales through margin calls due to a single word: Leverage.

Many institutional investors use leverage to enhance returns. That works great when markets are trending higher, but when they are falling fast, margin calls follow, and margin calls mean forced selling. At times like that, investors typically sell their winners to meet their margin calls. Most investors have been making great money in tech stocks for a long time, so they often sell tech to meet margin requirements.

With this selling comes an oversold market, and with that comes opportunity.

That is what I’m here to show you today. We can see this in the Big Money Index (BMI), which takes all the MAPsignals buy and sell signals and plots them on a 25-day moving average. This allows us to see money moving in or out of markets in a broad trend over roughly five weeks (25 trading days).

We can get a great idea of near-term trends when looking at the movements of big money.

Here’s what I mean. Here we see a chart of the Big Money Index for 2020. The deep blue area is the S&P 500 tracking ETF or SPY. The electric blue line is the BMI measuring money as it moves in markets (as they trend higher) and out (as money moves out). As the BMI starts to fall, markets tend to trend lower.

Big Money Index Chart

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

You’ll also notice a straight red line and green line. The red line on top is when 80% or more of all signals are Buys within the past 25 days. When the BMI tops the red line, buying becomes unsustainable and markets are deemed to be overbought. Conversely, when the BMI plunges below the green line, 25% or fewer of all signals are buys over the last five weeks. When that happens, selling is unsustainable, and the market is deemed oversold. Red line = 80%+ buy = Overbought; Green line = 25-% buy = Oversold.

Big Money Index Chart 1

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

Now let’s look at the BMI level last week:

Big Money Index Chart 2

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

I’ve circled the “oversold” signal so that you can clearly see that the Big Money Index went oversold last week, on May 25th. What this means is that big institutional accounts were selling stocks at a pace that is unsustainable according to MAPsignals’ data. When selling is unsustainable, markets tend to rocket higher near-term, once the selling concludes. To prove this statement, here is a table of all such instances in which the BMI has hit oversold territory since my data began over 32 years ago, on January 1, 1990.

Map Signals Table

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

There are a lot of numbers in there, but I’ll help you find the key data. There have been 20 such oversold instances in 32+ years, or about one every 20 months, so they don’t happen every year. This table is telling us one simple thing: Oversold markets on average result in very positive returns for stocks – 16% in the first year and 29% within two years, on average. But the rise doesn’t start right away. Since 1990, when the BMI goes oversold, it stays oversold for about 20 days. It takes an average of just under 10 days to hit rock bottom, and once the BMI goes oversold the S&P 500 could drop another 5% on average.

So, here’s the takeaway, folks. This accurate indicator called the BMI has just gone oversold for the first time in over two years. History says we could have a few more days, or even weeks, of choppy markets. But, as of May 27th, the SPY (S&P 500 tracking ETF) and QQQ (NASDAQ tracking ETF) have rallied 6.2% and 7%, respectively, from their lows, but the averages say the markets might ultimately bottom on June 6th. That’s great for those trying to perfectly time a market. But for those looking for a place to put money to work, this oversold indicator historically tells us that now is a good time to do just that.

Even if we face a recession, that doesn’t mean solid companies will go belly-up. Large-cap tech is one area to examine because it has been so beat up since last November. Currently, I am monitoring beat-up stocks with solid fundamentals. It is also good to look at stocks that have been habitually growing their dividends. I also like stocks that benefit from a recession, such as energy, food, and shipping. I’m also focusing on companies with solid balance sheets posting little to no debt, growing sales, earnings, and strong profits. Businesses like these are set to weather most storms. And this storm will pass.

Oversold markets cannot stay oversold, based on history. Now is a great time to take cues from big money being forced to sell. The selling will conclude, and value hunters will step in picking over deals.

History says it’s here, or around the corner. The BMI is oversold, and that’s the biggest bullish indicator I follow. Warren Buffett famously said: “Be fearful when others are greedy and greedy when others are fearful.” Oversold markets mean the fear level is high, so perhaps it’s time to get greedy?

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

Please see important disclosures below.

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

Important Disclosures:

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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