by Jason Bodner

June 30, 2020

Newton’s third law of motion states that for every action there is an equal but opposite reaction. It’s easily understood by sitting in a chair. Gravity pulls you down, but the chair pushes you up. If gravity were weak, sitting on the chair might bounce you up like a beach ball. If the chair’s force were weaker, it would collapse, crashing you to the floor. Since the forces are balanced, you’re sitting pretty.

We’ve all studied this stuff, and it may feel old hat, but Newton’s laws are fairly recent in human history. In fact, Harvard University was founded before he published his laws of motion – or invented calculus.

One way to think of forces is this: If two dogs want the same ball, unless some dog wins, you get this:

Two Dogs Want the Same Ball Image

But if one force is bigger than the other, then we get motion.

This becomes clear in the buying and selling of stocks. Think of it this way: If there is huge buying in stocks and ETFs – like there was a few weeks ago – that will propel the market higher. If buying stops, we might expect the indexes to drift higher until an opposing force pulls it the other way: It’s like a ball attached to a rubber-band. Hit the ball and it will bounce away – until the rubber-band yanks it back.

Our Mapsignals Big Money Index (BMI) helps us visualize Newton’s third law of motion in the stock market. The yellow line is a moving average of big money buying against big money sells. A reading of 75% means that 75% of all signals in the past 25 days were buys. When the BMI is at or above 80% (the red line), it is overbought, but the BMI may continue moving higher until an outside force acts on it.

Look at January 2020 (below). The yellow line marched higher as buying propelled the market higher. Suddenly it started to fall as sellers arrived. Using the “ball on the rubber band” example – the market is the ball. It continued rising higher. The yellow line is the rubber band. The rubber band started pulling it down because the sellers showed up, but it took a while for the market to follow suit.

MapSignals Big Money Index Chart

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

Here we are in a similar setup nearly six months later. The BMI is stalled and is starting to fall. The market has seen more volatility recently. Logic dictates that we are overbought.

What goes up must come down, right?

Now the data is starting to back that up.

This means that we are likely heading for more downside. Fear not: Lower prices are good for creating new buying opportunities: Volatility equals opportunity. I prefer buying stocks when no one wants them. To buy when everyone else is buying adds risk that, when the tide turns, you’re left holding the bag.

I see a great buying opportunity around the corner. Why? Sellers are starting to show up. It’s been nearly three months since we’ve seen any red sells.

The chart below is another way to visualize the Big Money Index. Here we have netted out the buy and sell signals to display only net buying or selling. (A green bar is a net buy day and red is a net sell day.)

Weeks ago, we saw record-breaking buying. I told you then that usually that’s not bullish. When we are overbought and everyone piles in to buy, it smells like a blow-off top. That’s the big circle off to the right:

MapSignals Big Money Stock Signals Chart

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

Then I told you the buying suddenly petered out. It slowed down immensely. The force reversed.

Red is starting to crop up for the first time in months (it’s in the small circle to the right):

Big Money Index Forecast Close-up Chart

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

The BMI tends to forecast what’s to come. Big money moves markets. That makes sense: the biggest players in stocks will have the most influence. They also tend to be smart and opportunistic.

The BMI shows that big money likes to sell when everyone is buying. And we now see that sellers have finally started to overcome the non-stop buying.

As we can see in the second chart, we rarely see a singular red stick. Red and green come in waves – small at first then intensifying. Then it ebbs and gives way to the opposite force.

Now is the time to have your shopping list of great stocks ready.

Remember, I told you in the depths of March, when the BMI was deeply oversold, that was a great time to buy stocks. Indexes rallied roughly 40% since then. Now we are likely topping out as sellers show up.

To see where the market is going, we look at where it flows. But the real flow is the flow of big money. It tells us what’s likely coming next.

Author Banani Ray said, “Flow is the nature of energy; flow is another name of life.”

When markets go straight down or straight up, it is like a force stretching the rubber band. Eventually it snaps back. We had extreme selling, which snapped back to extreme buying, which now needs to snap back. The very first hints of a turning tide are here. History suggests lower prices are just over the ridge.

I know which stocks I want to buy… do you?

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
My Real-Time COVID Indicator is Flashing Red

Sector Spotlight by Jason Bodner
Go with the Flow (Newton’s 3rd Law of Motion)

View Full Archive
Read Past Issues Here

About The Author

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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