by Jason Bodner
July 2, 2024
As a hockey fan, I’m overjoyed that my secondary favorite (after the Rangers) won the Stanley Cup. But that also means the season is over. Let the silly season begin. Trade rumors heat up, roster moves happen, and other shenanigans. Nerds like me – those who know that “hockey” derives from the French word hoquet, meaning shepherd’s stick – find fun in rumor and innuendo, but daily nonsense has little value.
Historically, stock rumors carry the same value this time of year. Q1 earnings are over. School is out. Summer breezes are here, and things aren’t really “back-to-business-as-usual” until September.
That means some silliness can happen. Stocks will gyrate more in the summer, on lower liquidity. We can see lower liquidity in the form of average big money trading (left) coupled with dwindling breadth (right). The number of stocks making news three-month highs, or lows on abnormal volume, is trending closer to zero as you can see in the yellow wedge pattern (right chart):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
These lower breadth and liquidity conditions can make for jittery markets, both up and down. For instance, on Friday morning, the market was up nicely with all main indexes up, then it dropped back down. One reason for the rise is that PCE rose at its slowest level since March 2021, which indicates that inflation is moving back towards the Fed’s preferred range, meaning that the path to rate cuts is clearer.
Another reason is that the first presidential debate is now behind us. That debate was not a moment to be proud of in American history, as President Biden appeared a bit frail, which indicates a greater likelihood of a Trump victory. Things may change in the upcoming months, but for now markets love anything implying a trend towards certainty. June 30 is also the end of a quarter, a time for tallying up some profits.
The good news is that most sectors are holding up relatively well. Tech remains our top-ranked sector, which is usually bullish. When a growth-heavy sector leads, that shows strength in the market and the economy. Energy, Industrials, and Financials round out the top four. Discretionary continues its slow rise from the depths of the table, which also bodes well. Utilities are softening after a parabolic rise in the AI universe. The story was that AI will require so much power that utility companies will go into overdrive.
One area I would like to see higher in the table is Healthcare. The sector currently reflects a real tug of war, with mediocre fundamentals and weak technicals dragging down the sector:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The bad news is that the price action shows stalling on a sector level. Despite markets hitting new highs, it’s not convincing for a few reasons. The first, as we discussed earlier, is that breadth is weakening. That translates to lower conviction and a few mega-cap stocks hogging up much of the capital. Just around half of the stocks in the S&P 500 remain below their 50-day moving averages:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Price action on a sector level shows no decisive leadership. Tech and discretionary are showing recent technical strength but not much else. Energy is tired, Industrials and Financial are sideways. Utilities are falling back after being heavily overbought. Real Estate is struggling to rise, as are Materials. In fact, the strongest looking sectors for technicals are Staples and Communications, hardly a reason for excitement:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This all means that, despite a rising index, we see an indecisive market under the surface.
Then there’s the problem of the Big Money Index (BMI). As the market rises (which we now know is powered by mega-cap stocks), the BMI falls. Our first instinct might be to worry as a falling BMI must mean money is gushing out of the market. That could mean the market would crack and fall apart soon.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
But that isn’t necessarily true. Since 2005, buying accounts on average for 55% of all signals. That slight imbalance helps explain the long-term up-trend in markets. After all, the Vegas casinos only need slightly more than 50% winning percentages to make enough to fund their staff, real estate and billions in profits.
That slight imbalance would also account for a rising BMI. Therefore, a falling BMI means that selling is increasing, right? The answer, once again, is not necessarily. The BMI can fall when buying slows, even with selling staying level. This is because it is constructed from a 25-day moving average. As the old big buys roll off, the BMI can fall, just because there is less buying pressure.
That is the current case, as seen in the wedge pattern of buying versus selling, but the fall in the BMI has been dramatic. Since its peak at 91 on January 3rd, it has fallen 54% (49 points) to 42, a drastic drop.
I wanted to see what that means for the future. I already mentioned that heavy selling can pressure a BMI to drop, but so can a slowdown in buying. As this is the case, I wanted to compare similar times in history to the current situation, so I took data starting in 1990 and looked for all the times that this happened:
- Whenever the BMI dropped from overbought (from 80 or above), and:
- It dropped between 45 and 55 points (like the recent 49-point drop).
I found 58 such instances: The forward returns were quite good, and the frequency of wins was high:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Knowing this, I wanted to refine the search further, given that currently breadth is low. Stocks are neither getting bought nor sold convincingly, so I added an extra layer of filtering to find times that buying and selling, while low in number, were also balanced closely. In other words, if buys and sells came close to cancelling each other out. There were 30 instances. Again, future returns were good, with high frequency:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It will be interesting to see how this turns out, but the current data tell me not to overreact by preparing for Armageddon. July should be strong, followed by the usual bumpy August and September.
To know where we might be headed, it helps to know where we’ve been.
“If a man knows not to which port he sails, no wind is favorable.” – Seneca
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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A Look Ahead by Louis Navellier
Will Election Year Chaos Torpedo This Bull Market?
Income Mail by Bryan Perry
Leveraged High Yield Bond Closed-End Funds Look Attractive
Growth Mail by Gary Alexander
There’s a Lot for Americans to Celebrate This July 4th
Global Mail by Ivan Martchev
The Stock Market is Acting a Little Tired
Sector Spotlight by Jason Bodner
As July Dawns, The Market’s “Silly Season” Begins
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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