by Jason Bodner

August 17, 2021

When he appointed Joseph Kennedy to head the new Securities & Exchange Commission, President Franklin D. Roosevelt, said, “It takes a thief to catch a thief.”

In the late 1970s, FBI agent John F. Good thought the same thing. While investigating an art forgery and theft, he convinced con man and swindler Max Weinberg to help him by offering a lighter sentence, so Max exposed a forger who in-turn suggested Good investigate Atlantic City for government corruption.

The FBI followed up by forming a fake Arabian company, Abdul Enterprises, which attempted to bribe local officials for favors. The ladder of corruption continued higher as Good kept climbing. Eventually, Members of Congress were offered bribes as part of the operation known as ABSCAM. Almost a quarter of them accepted the bribes and were later convicted. It inspired the 2013 movie, American Hustle.  

The age-old lesson is: “Big fish can become bait for bigger fish.” I think that’s what is currently happening in the stock market… The big indexes look great, but the data underneath is deteriorating. In essence, I think sellers are offering some of the best stocks out there as bait to land a bigger sell-off.

Before I go further, let me add: Should a pullback happen, don’t fear. I see it as a buying opportunity.

I hold different stock portfolios for different purposes. One is for long-term dividend reinvestment. Another is buy-and hold, don’t look back. Another is higher risk. All have one thing in common: Growth.

I love companies that grow their sales, earnings, profits, and market share. That’s a great long-term recipe for capital appreciation, but there are tradeoffs:

  • The good news: Historically, growth outperforms value, long term.
  • The bad: When growth comes under pressure, it tends to hurt more than other areas of the market.

In that light, welcome to “growth under pressure” circa August 2021.

The first thing we see in these three charts is that the three main indexes are happily chugging higher. Casually looking at the charts of DIA, SPY, and QQQ, an investor might think the weather is fine:

Big Money Charts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Looks good, right? All three indexes are at or near all-time highs and are even seeing fresh Big Money buying in their related tracking ETFs. Nothing to worry about, right?

Well, first let’s look at the fourth important index, the small-cap-loaded Russell 2000 index ETF (IWM). It can’t keep up with the other three and has been struggling almost all year since peaking on March 15. Big Money Chart Buy and Sell

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The sputtering Russell 2000 is the first indication that something might be amiss.

Now let’s overlay the Big Money index on the SPY chart. Big Money buying and selling moves markets. The BMI is a 25-day moving average of all unusual buying and selling of stocks. When it trends higher, markets follow. When it drops, the 30-year history suggests markets will follow soon after. It’s dropping: Big Money Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This tells us that one or two conditions may be going on:

  1. Buying is dwindling
  2. Selling is increasing
  3. Or Both

Well, it’s both: Increased selling and decreased buying. We can see that in the Big Money stock Signals:

MapSignals Big Money Stock Signals

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Breadth is drying up. The BMI is falling, buying is slowing, and selling is picking up. So, can we assume that a pullback might be around the corner?  Let’s look beneath the glossy market veneer for an answer…

The market right now is being propped up by some big stocks. They may be great quality companies, but there are only a handful of big names doing the heavy lifting.

We can get a better picture by looking at what is rising and falling within the market. Large cap tech, industrials, and banks have been lifting. We see that in upward ETFs like RSP, PAVE, and XLU:

Big Money Charts 1

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As for stuff getting hit, it’s China, small cap growth (including biotech), and gold.

We see that in ETFs like FXI, ARKK, and IAU – all sagging:

Big Money Charts 2

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

To drive this point home, I created baskets of stocks and compared returns. First, we have household names I’ve observed holding up the market: Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Facebook (FB), Costco (COST), Nike (NKE), and Lululemon Athletica (LULU). I launched a MAPsignals.com database basket once all these stocks got Big Money Buy signals.

Since April, this basket of stocks is up 20.6%.

Portfolio Charts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In contrast, we have high growth stocks that I observe going down while the bid indexes rise. They are Canada Goose (GOOS), Abercrombie & Fitch (ANF), Bandwidth (BAND), Beyond Meat (BYND), Coupa Software (COUP), Global Payments (GPN), Just Eat Takeaway.com (GRUB), Grow Generation (GRWG), Micron Technology (MU), Pinterest (PINS), and Digital Turbine (APPS).

Portfolio Charts 1

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This basket of stocks is down 26.5% since February.

It’s clear that investors are selling growth in favor of old reliable big-cap tech and beneficiaries of infrastructure. Circling back to our original concept of “bait,” the data forecasts a possible correction coming. We see indexes rising but only on a few strong stocks. We see growth, often the fuel for big bull markets, falling beneath the surface. We see breadth dwindling as buyers slow and sellers increase.

Lastly, we are in August with historically volatile returns. The following table (I’ve shown it here often) shows SPY returns for the last 25 years. August is up only 60% of the time and averages a 0.49% decline.

I think growth stocks are the bait to lure the bigger fish into a sell-off. And should that happen, growth will already have felt the pain. That’s why you should craft a list of great stocks to buy should volatility arrive.

If that comes, we can look forward to an end-of-year lift: September through December are historically up 88% of the time with average gains of 5.04% for those four months.

Navellier & Associates owns Apple (AAPL), Microsoft (MSFT), Facebook (FB), Costco (COST), Nike (NKE), Lululemon Athletica (LULU), Grow Generation (GRWG), Pinterest (PINS), and Digital Turbine (APPS) in managed accounts but does not own Alphabet (GOOGL), Canada Goose (GOOS), Abercrombie & Fitch (ANF), Bandwidth (BAND), Beyond Meat (BYND), Coupa Software (COUP), Global Payments (GPN), Just Eat Takeaway.com (GRUB), or Micron Technology (MU).

Jason Bodner personally owns Microsoft (MSFT), Alphabet (GOOGL), Costco (COST), Nike (NKE), and Digital Turbine (APPS). His management company owns Lululemon Athletica (LULU), Canada Goose (GOOS), Global Payments (GPN), and Digital Turbine (APPS) in managed accounts. MAPSignals Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

One final thought: The dividend yield on the S&P 500 still makes stocks more compelling to own than bonds, even at these market highs. The following table shows that holding the S&P 500 and collecting a 1.3% dividend yield trounces holding a 10-year bond on an after-tax basis by 29%: MAPSignals Table 1

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Wrapping up, the data signs point to volatility on the horizon. That’s standard fare for August, so when (or if) a correction comes, get ready to buy, since when clouds part, 88% of the time it’ll be glorious.

Seneca the Younger

“You learn to know a pilot in a storm.” – Lucius Annaeus Seneca (the Younger)

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

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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