by Jason Bodner

August 18, 2020

Once upon a time, stocks were reserved for those with plenty of money, and the big traders, or “operators” as they were known, were the big movers of the market. The big operators could dictate market moves, up or down. Perhaps the most famous early market operator was Jesse Livermore (1877-1940). He was the inspiration for the book, “Reminiscences of a Stock Operator,” by Edwin Lefèvre.

Stock Operator - Jesse Livermore Image

If you’re a stock buff and have never read this book, you should. It’s a fascinating guide to the psychological aspect of speculating on stock prices. It’s filled with lessons that reveal the secrets of the biggest operator of them all. He had deep respect for patience, which in our modern vernacular equates to investing. He repeated over and over in the book that he made his money not by trading but by holding.

Also, several times in the book, the main character reveals that size is the key to the market. He would often do small test trades to see if the market could absorb his small order. For instance, if he suspected a market was primed for weakness, he would send in a small buy order. If it was sold immediately, he would then test a small sell order. If it was difficult to find a bid, then he knew the market was weak. It was time to pounce. He would sell big and essentially crack a market and start a major move downward.

It was partially due to this technique that he was able to sell short into the crash of 1929. He netted $100 million – the equivalent of $1.5 billion in today’s dollars. That’s a perfect illustration of understanding the power of big money and knowing which way it’s flowing. I have reread this book many times and have taken valuable lessons from it. I even coded some of these lessons into my system, which identifies when big money is moving in and out of stocks. It helps identify how big money moves markets.

On a top-down level, the Big Money Index (BMI) sums up all big money buying and selling and plots it into a 25-day moving average. When it goes below 25% of all signals as buys, the market is oversold. That allowed me to identify buying opportunities in December of 2018 and March of 2020.

Russell 2000 versus MapSignals Big Money Index Charts

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

One level deeper, we can look at ETFs as a barometer for all equities. When big money moves in and out of ETFs, things happen. Here we can see a correlation to big buying in ETFs and near-term peaks. But it’s not nearly as convincing as when there is big ETF selling. Look at how perfectly it lines up with troughs.

When big money is flushing out of everything, bottoms are often near. Soon, no sellers will be left. Markets typically pivot shortly thereafter. Again, this is just like December of 2018 and March of 2020.

MapSignals Big Money ETF Index Chart

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

As we dig deeper, we can see which sectors are collecting and losing big money. Here we see a weekly table of big money buys and sells. We see that selling is virtually nowhere to be found. Buying is alive and well. And it is especially alive and well in Materials, Industrials, Communications, and Discretionary stocks. The trend for months has been Tech and Healthcare. Now we see the rotation underway as Tech and Healthcare are both seeing signs of selling for the first time in months. While not significant yet, the selling in those sectors visually jumps out. This is in stark contrast to the months leading up to now.

MapSignals Sector Rankings Table

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

The final level I look for is big money moving in and out of individual stocks. That’s what allows me to isolate what I call the “outliers.” Statistically speaking, an outlier is a deviation from the norm. Normally, that’s not always a good thing. But when it comes to stocks, it helps me find the LeBron James or Wayne Gretzky of stocks. Outliers are the best – the ones that keep going up, year after year, defying the odds.

I can’t get into too much detail here on which particular stocks are appearing on my radar today, but I will tell you they all have some things in common. They grow sales and earnings over the years. They have fat profit margins. They have little to no debt. They lead in their industry. And big money flocks to them.

Jesse Livermore knew the power of being on the right side of big money. He also learned that being patient is what made him his big money.  That’s the recipe: find outlier stocks that big money loves. Buy them. Then sit and wait. Livermore knew it well, when he said, “It never was my thinking that made the big money for me. It was always my sitting.”

Jesse Livermore Quote Image

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

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
A Weak Dollar is Generating a New Round of Inflation

Income Mail by Bryan Perry
It’s High Noon for High Yield Bonds

Growth Mail by Gary Alexander
Sleep Better with “Rip van Winkle” Investing

Global Mail by Ivan Martchev
Could Mortgage Rates Go Lower Than the Last All-time Low?

Sector Spotlight by Jason Bodner
Jesse’s Secret: Sitting on Your Winners

View Full Archive
Read Past Issues Here

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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