by Jason Bodner
July 4, 2023
Fireworks, friends, cookouts, and emergency room visits… sounds like the stuff of July 4th weekends!
Yes, you have a higher chance of going to the hospital on Independence Day. According to some sources, you have an even higher chance of losing a digit or limb if you happen to be in Florida for said day.
Perhaps neither should come as a huge surprise. Mixing alcohol and explosives… what could go wrong?
That statistic is a bit like saying: “Hey, you have a higher chance of dying in a car crash if you’re in a car, and even more of a chance if one driver is drunk.”
Here’s the thing about speaking statistically: some statistics are obvious. Fireworks and injuries shouldn’t shock anyone. But sometimes numbers aren’t obvious… for instance you have a remarkably high chance of dying on July 4th if you’re a President. Thomas Jefferson and John Adams died on the fourth of July, exactly 50 years after the Declaration was signed, in 1826 vs. 1776. Most people have heard about that, but did you know that another President died exactly five years later. Our fifth President, James Monroe, died on July 4th 1831, so that’s three of our first five Presidents dying on July 4th. And America’s first great songwriter was born the same day Jefferson and Adams died, on July 4th, 1826. It gets crazy.
Those are coincidences with small data sets, but if you have millions of samples, probability becomes much more reliable (to the extent that it can be) when you have meaningful outcome from a big data set.
The reason I love the stock market is because it is a massive data set. This is why you read so much about “quant funds” and “algo traders.” They love big data, and stocks give us tons of data!
Today I’m going to focus on how to pick great stocks using stats and probabilities. It’s a holiday weekend and the market will be quiet, so it’s a perfect time to learn an essential lesson… if not the essential lesson.
First, it’s time for another stat: the best-performing 4% of listed companies provide the net gain for the entire U.S. stock market since 1926, as all other stocks collectively matched Treasury bills. This is from the summary of a paper written by Hendrik Bessembinder entitled: Do Stocks Outperform Treasury Bills?
Out of 26,000+ stocks studied from 1926 – 2018 (when the paper was written) roughly 1,000 stocks accounted for 100% of the gains of stocks above treasuries. It looks like this:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Perhaps even more fascinating is that he found 1% of stocks accounted for 50% of the market gains above Treasuries! What if I told you picking stocks is as simple as an equation. The formula is:
Superior Fundamentals + Strong Technicals + Big Institutional Support = The Best Stocks
I know what you’re thinking: “That formula seems a bit vague.” Show me the numbers!
That’s true. Each ingredient has levels of depth and some numbers attached.
For instance, when it comes to Superior Fundamentals, generally, I like businesses that have:
- Double digit percentages of 1- and 3-year sales and earnings growth
- Below 25% debt/equity ratio
- Double digit % profit margin
When it comes to Strong Technicals, generally, I like businesses that:
- Trade near 52-week highs
- Trade near interim highs
- Are in a leading sector and/or leads their sector.
When it comes to big institutional support, generally, I like companies that:
- Exhibit unusual institutional buy signals.
- Rank on our Top 20 report.
- Ideally is an established Outlier – repeatedly on the Top 20.
More or less, the above is how our system whittles down 6,000 stocks to 1400 under consideration, and then finally down to 20 powerhouse candidates each week. That’s 20 out of 1,400, or 1.4%.
Honestly, it’s as simple as that. Of course, the tough part is grabbing and analyzing all that data. In order to identify the 20 best stocks a week, one must start with all stocks – I start with 6,000. Then we apply the relevant algorithms (formulas) to rank them. Then we look for unusual buying and selling. When the best ranked stocks are getting bought up in a big way, that’s the ideal pool from which to select the top stocks.
Checking in on the overall market is usually my starting point. The Big Money Index (BMI) gives us a great idea about overall money flows. After a soft previous week, the BMI is once again on the rise:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is due to not only buying strengthening, but also selling waning. In the chart below, notice the green staying strong while the red shrinks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It’s important to know where that buying is taking place. Looking at last week, we can see that small and mid-caps are being snatched up:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Lastly, we can see what sectors are getting bought as well. Looking below, we see growth areas like Industrials, Discretionary, Tech, and Health Care are bid. Together these four sectors account for 65% of all buys over the last week (excluding Friday):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The market’s temperature is warm, despite the bearish rhetoric in the media and some dire outlooks, so either the stock market is stupid and ignoring the dangers, or it’s smart and knows something that others don’t. The market is a forward-looking pricing machine – usually looking six months or more ahead – so if a hard recession on the horizon for 2023, we would see it reflected in the buying habits of big investors, but right now, they are clearly buying growth, so we should apply the formula above to identify the best stocks to be in. If we do, we will have a statistically higher likelihood of making money from stocks.
It turns out it might be as easy to win with stocks as it is to send yourself into the hospital on the 4th of July by getting to close the fireworks. When it comes to stocks, acquiring these skills will stack the odds in your favor. And as Scott Adams said: “Every skill you acquire doubles your odds of success.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Putin Faces Growing Chaos at Home
Income Mail by Bryan Perry
Stocks Enter a Nice Glidepath for July
Growth Mail by Gary Alexander
Happy Birthday, America – and Calvin Coolidge
Global Mail by Ivan Martchev
The Yield Curve is as Inverted as It Gets
Sector Spotlight by Jason Bodner
A Simple Formula for Increasing Your Odds for Success
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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