by Jason Bodner
August 15, 2023
Wouldn’t it be nice to be able to predict the future? Interestingly enough, history is littered with examples of that happening, ranging from mythical level status, like Nostradamus, to preposterously accurate predictions from the Simpsons TV show. It turns out that Nikola Tesla predicted cellular communications and Wi-Fi 90 years before they existed, when he said: “It will soon be possible to transmit wireless messages all over the world so simply that any individual can carry and operate his own apparatus.”
Wouldn’t it be nice if someone could tell us what’s next for individual stocks and the overall market?
That question always intrigues us, but it may seem less urgent when there’s a nice bull market chugging along. Then, the question suddenly becomes more important when we hit an air pocket or speed bump.
A few weeks back, I started warning of pending seasonal turbulence in August. As if perfectly scripted, August trading began with a stinker of a -2.72% drop through last Friday (on the S&P 500), and more losses on the NASDAQ Composite (-4.9%) and Russell 2000 (-3.9%). But if you recall, this is entirely normal. In fact, since 1990, August and September have been the weakest two months of the year. You can see that in the chart below, showing average monthly performance since 1990, using FactSet data:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Couple this with a Big Money Index (BMI) that just fell from overbought, and you have the makings of a widely anticipated correction. The BMI just fell from a peak reading of 83.9% on August 1st down to a softer 78.4%. The overbought threshold is 80% and once a BMI falls from overbought, historically we expect to see weaker prices. This supports our historical findings of weaker Augusts and Septembers.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We also see a notable slowing in unusual buying, with a small increase in unusual selling of stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Of course, if we know anything about markets, it’s that “anything goes” with stocks. And for the record, I am not bearish. Quite the contrary, I believe we are in for a big Q4 and strong 2024, for several reasons:
1). The CPI just came in slightly lower than anticipated, with ALL categories down year over year, as you can see in this shrunken CPI tracker since January 2022. Although the print is tiny, just notice the green trend charts (at the right), which show year over year numbers declining in all categories:
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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
- 2). The Fed is close to (or now actually) done raising rates. Inflation is falling continually closer to their long-term goal of 2%. We now sit at 3.2%, which is significantly below the effective Fed funds rate. That spread of +1.92 (between the CPI of 3.2 and effective Fed funds 5.12) is the largest since July 2009. From that starting point, the S&P 500 went on to an immense rally of +383%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
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3). To further support a longer-term bullish narrative, despite softening prices, the earnings cycle for Q2 has been strong. According to FactSet, as of August 4th, 84% of the S&P 500 companies have reported earnings with 79% beating earnings estimates and 65% of companies beating sales estimates. It is clear there is no “Earnings Apocalypse” that pundits called for in the beginning of the year.
4). It is also clear that the hard economic landing has not come. It is now debatable if we will even have a soft landing (or any landing). Earnings are working, the economy is robust, and so is the labor market.
5). Extending the previous chart, October through December often deliver the strongest seasonal returns:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
With earnings season nearly over and a seasonally volatile period starting, now is a great opportunity to trim exposure, take profits, and free cash for purchases of high-quality stocks at potentially lower prices.
The question becomes: Where to find opportunity?
We can find some hints in the relative sector strengths and weaknesses of late. First, Technology, which reigned supreme for months, suddenly has fallen to #3, behind red-hot Energy and Discretionary.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
With the rise in crude oil prices, perhaps it’s no surprise that energy has vaulted to #1.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We also notice that there has recently been an explosion of buying in energy stocks. In the charts below, you will notice energy buying and muted activity in discretionary and tech stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The remaining sectors, while holding steady, are starting to see small signs of selling:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
For now, the future seems uncertain for stocks in general. That is, until October, if history holds true.
Summer is here and so is volatility. The game plan for me is to take some profits and use that cash to identify great stocks on sale. Energy looks like it may want to lead higher for a while.
I think opportunity will be there. We will see what the future holds very soon.
As Malcom X said, “The future belongs to those who prepare for it today.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
China May Soon Export its Deflation Worldwide
Income Mail by Bryan Perry
It’s A Rough Path – But Is Inflation Coming Down?
Growth Mail by Gary Alexander
A Tale of Two Downgrades – A Bang (2011) and a Whimper (2023)
Global Mail by Ivan Martchev
Watch the Bond Market for Stock Market Clues
Sector Spotlight by Jason Bodner
The Stock Market Seasons are Unfolding as Predicted
View Full Archive
Read Past Issues Here
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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