by Jason Bodner
August 16, 2022
How many times have you heard it said, “It’s as simple as black and white”? But like most things in life, even defining “black” isn’t so simple anymore. For instance, in the presence of light, black is the combination of all colors, but if you remove all light radiation, black is the absence of color.
So, I ask you this: What really causes a market to collapse? The first answer that will come to most of us is obvious: Too much selling! But if we look at it from another perspective, the answer is actually not that simple. It’s complex, like the definition of black. What causes a market to turn from bullish to bearish is actually the absence of buying. This week I’m going to walk you through exactly what I mean, using pictures. But before I do that, there’s one other concept you should grasp. When a bull market comes after a bearish episode, I would say that it’s actually the lack of selling that causes a market to resume its rise.
The initial COVID-19 pandemic of early 2020 is a great place to start. By now, we all know the impact of economic shutdowns associated with this unknown virus caused stocks to sink incredibly fast. And we can see that below. The market was clearly chugging along and then came the snake in the grass: COVID.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It’s plain to see that the huge red selling drove the market into the ground and then big blue buying lifted us right back up. But if we zoom in, we see it’s not entirely that clear cut. In late February, the SPY was still rising. But buying was waning, then it suddenly stopped and didn’t appear until April.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As buying shrank, the BMI started to fall from overbought.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Investors didn’t know buyers were disappearing, since SPY kept rising, so when selling finally hit, there was no buying to absorb the distribution without impact. This is the key point, because there is always selling in the stock market, but if there is buying pressure, buyers just absorb the sellers and that pushes the market higher. Vice-versa, when sellers vanish, there is no one left to keep buyers down. That’s what happened after the BMI went oversold in April. The buying couldn’t begin again until selling left town.
Let’s fast-forward to mid-2022: At the end of June, selling started to dwindle and get out of the way, but buying didn’t really pick up until mid-July. It’s that pivot I am talking about. You can’t really get this data anywhere else, but what it allows us to see is that buying seems less important than a lack of sellers.
We saw the same with ETFs, shown here beside the stock chart, as buying quite suddenly intensified:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Big Money Index (BMI) helps light the way. It went oversold July 14th and the markets have rocketed higher ever since. Since that day, the QQQ (the NASDAQ tracking ETF) rallied 20.3% while the SPY (S&P 500 Tracking ETF) rallied 11.1%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It’s important now to restate: The bear market truly began when buyers stopped buying. At the end of 2021, the Fed talked tough and splashed water on the fire. Assets like tech stocks and crypto started to fall. As 2022 rolled into spring, all stocks felt the burn. The signal to buyers to stop buying meant sellers could step in with nothing to get in their way. The July 15th selling just dried up, as you can see here:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Then the buying flooded in. And unlike the better part of the last two years, it hasn’t been a big rotation of capital from one sector to another. As you can see below, there has been buying since mid-July in Discretionary, Staples, Utilities, Real Estate, Industrials, Tech, Financials, and Health Care.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Energy buying stopped in June and only recently reappeared.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Health Care has been the leader since mid-July. In fact, 26.5% of all unusually large buying has been in Health Care stocks. Tech, surprisingly, was a close second.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
What’s clear now is that money is flowing into stocks, and the opposite-but-equally-vital message is that the sellers have virtually vanished. With more and more clarity coming from the Fed, the horizon seems clearer. With the CPI report coming in lower-than-expected, the message is clear: Inflation has peaked. As inflation cools and interest rates stabilize, the market is cheering as clarity starts to snap into focus.
I think this sets up for a stabilizing third quarter for stocks, and then a rally going into the end of the year.
There’s an old poker proverb that says: “If you’re in a poker game and don’t know who the sucker is, get up and leave. You’re the sucker.” So, if you’re bearish, you might want to look around to see if you can find any other bears. The thing about bears is: They can sleep for a long, long time, so just make sure you’re not out there acting like a bear… all alone. In our charts (above), by the way, the bears are red.
As our data clearly shows, the bears just got tired and decided to take a nap.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Inflationary Fallout of the Inflation Reduction Act
Income Mail by Bryan Perry
The European Market is a “Big Short” in the Making
Growth Mail by Gary Alexander
Growth Was Born 200 Years Ago… Did it Just Die?
Global Mail by Ivan Martchev
Here Comes the S&P 500 Line in the Sand
Sector Spotlight by Jason Bodner
Which is More Powerful – Big Buying or Big Selling?
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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