by Jason Bodner
July 18, 2023
Patterns sometimes appear out of nowhere. Sometimes they defy logic. “Breton” is a Great White Shark with a GPS tracking device. It turns out he unwittingly drew a self-portrait with his movements:
Unless he is an artist dying to be recognized, this was entirely coincidental. It’s cool nonetheless. It also speaks to the human proclivity to find patterns when there are none. Known as Apophenia. or patternicity, this helps to explain why we see patterns in Constellations, or faces in clouds, or that eerie dude on Mars:
In markets, it works both ways. Investors may see patterns when they don’t exist. Bullish patterns appear more when greed grows, or bearish patterns when anxiety just won’t go away. But we also miss patterns that actually are there. It doesn’t help that the stock market is a master of deception and camouflage.
But if we put on some “X-ray glasses” of sorts, then we might be able to see some hidden patterns.
These days, the hidden patterns are telling us one crucial thing: Big Money is loving stocks.
This may seem counterintuitive, considering the mostly-negative headlines that consistently come out. I (as recently as Thursday, after the inflation reports came out) saw fearmongering about Fed rate hikes coming. I just don’t see it. Let’s look for the patterns in the data together.
By now, you likely have heard that year-over-year (YoY) inflation came in at 3% vs. 3.1% expected. That’s great but there are key points not to miss. Below – I compiled the essential CPI data:
- A year ago – YoY inflation was 7.7%.
- Peak inflation was 9.2%.
- 19 of the 21 categories in last week’s June inflation reports (including the header categories) are falling. You can see them in the trend-lines that I added.
- Only Medical commodities and shelter cost inflation persists.
- The Fed’s long-term goal for inflation is 2%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Another key point is that for the first time since 2020, the all-items inflation rate is lower than the Fed funds rate. Even core inflation (YoY) at 4.8% is lower than the target rate of 5.00-5.25%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Lastly, the 10-year Treasury rate has dropped substantially from over 4% to under 3.8%:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As Louis Navellier often says: “The Fed doesn’t like to fight market rates.” And market rates are falling.
So, I don’t personally buy into the Fed rate-hike fear hype. I think we can all clearly see that inflation is waning and moving ever closer to the Fed’s 2% goal. If the Fed cools too much, it could do more damage than good – and I think they are acutely aware of this.
With that out of the way, it seems like the market has known – or at least felt – this for a while. Digging into the data we see very clear healthy bullish patterns.
First and foremost, the Big Money Index (BMI) is rising fast, at 79% and showing no signs of slowing.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This may freak you out a bit, watching it inch ever closer to overbought, but it’s important to understand that an overbought BMI doesn’t necessarily signal an immediate drop in stock prices. In fact, during COVID, the BMI remained overbought for 84 days – the longest stretch in BMI history:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That means we must focus on when the BMI starts falling – especially from overbought. For now, just enjoy the view. We also see bullish patterns in buying and selling of stocks. According to Mapsignals.com data, we can see that selling has dissipated significantly. Buying is strong in both stocks and ETFs:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We can also see that buying continues to be heavy in small and mid-cap stocks. This is very healthy as capital tends to seek safety in large and mega caps in troubled markets:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now as we look to sectors, we can see clearly that buying is heavy in growth sectors. But we also see that fundamentals are strong in the growth sectors.
Look as we see Technology, Discretionary, and Industrials leading the sector rankings.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We also notice (above) that defensive sectors are lowest in the rankings. Health Care, Communications, and Utilities are lowest ranked in overall scores. Health Care is a “double agent” in that it contains both growth stocks full of innovation (and tech stocks), but they also contain the big old dividend stalwarts.
The patterns continue in the individual sectors. Healthy green dominates all sectors except Utilities and Communications. It’s important to note that Communications is the smallest sector in terms of number of constituents. It contains only 23 stocks. In comparison, Tech has 248, and Healthcare has 236. That leaves Utilities which is replete with dividend payers. This says investors want growth and equity appreciation:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The patterns are clear, but many investors would rather continue to bathe in the negative news narrative. I say “let them,” as we need investors to buy from. The BMI is near overbought but I focus on when it falls.
Instead of seeking patterns where there are none, focus on existing patterns that may be shrouded by hype and emotion. The data are clear to me: The Fed will likely adopt a wait-and-see approach, and equities will continue to run. This summer may bring about some volatility and perhaps a welcome pullback for those waiting on the sidelines. But the trend is clearly up for stocks – especially growth stocks.
“To understand is to perceive patterns.” – Isaiah Berlin
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Fed Governors Are Waging a War of Words… Again
Income Mail by Bryan Perry
The Yield Curve Suddenly Tightens – a Bullish Development
Growth Mail by Gary Alexander
July 4th Is a New Thanksgiving Day – With Two Bullish Surprises
Global Mail by Ivan Martchev
The Short Covering Rally is About to Stall
Sector Spotlight by Jason Bodner
The War Between Market “Noise” and Vital Data
View Full Archive
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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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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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