by Jason Bodner
August 23, 2022
Did you know that Australia is wider than the moon? The moon is 3,400 kilometers (2,100+ miles) across, while the width of Australia is 4,000 kilometers (2,500 miles). Strange? Sure, but it made my head tilt and my eyes widen when I read that. It also made me realize that things aren’t always what they seem.
Last week’s price action for stocks was a bit of a bummer. Stocks snapped their winning streak and largely ended lower. The QQQ (NASDAQ’s tracking ETF) fell an ugly -2.3%. This was disconcerting and could open the door for a bunch of questions, such as, “Was July just a bear market rally? Are we headed back lower? Was this buying frenzy really just a head fake? Is it time to turn bearish again?”
Let’s try and contextualize last week and provide answers to these questions. But right off the bat, I’m going to tell you that the data I’m looking at is still quite bullish, which means that the market is likely just giving some of the froth back that it gained in the past four weeks. Let’s examine the data further…
Let’s start with the Big Money Index (BMI). On July 14, the BMI went oversold. The QQQ has gained 16% trough to peak since then and an astonishing 24% since the June 16th low. The BMI never looked back. In fact, it rocketed higher and has now reached overbought territory in what feels like record time:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The graph above can actually seem disconcerting because, as we’ve seen, when markets go oversold, we can expect a violent snapback higher, and that’s exactly what happened since our July 14th oversold reading. But now that the BMI is overbought for the first time since December of 2020, does that mean we should expect a violent snapback lower? The answer, surprisingly, is actually no.
In fact, we looked at all the instances in which the BMI went from oversold to overbought in three months or less. Out of the 11 times this has happened since 1990, you may be surprised to hear that the market was higher one week later, one month later, three months later, and 12 months later! Here’s the evidence:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That’s a pretty powerful track record, to say the least. It’s important to note that we’ve seen solid buying since the market put in its June lows and since the July 14 oversold BMI signal.
Next, let’s take a quick look at all the unusual buying and selling in stocks and ETFs. You’ll see in the charts below that we’ve seen more buying coupled with no significant selling for the first time all year:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Stock buying has been quite strong since mid-July. And even though ETF buying is not particularly large, it’s the first real buying we’ve seen since February, when buying was heavily overshadowed by selling.
So far, this data doesn’t really look bearish. What might have me question this rally is if there were heavy rotations going on, but that’s not what I’m seeing. Since mid-July, as you can see in the charts below, we’ve seen significant unusual buying. You can clearly see the blue bars (denoting large buying) in discretionary stocks, tech, financial, staples, utilities, industrials, health care, and even real estate stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Heavy rotation would probably leave the remaining sectors reeling, but that’s not what we’re seeing. Looking below, we can see communication stocks mixed, at best, with no selling to speak of. Material stocks seemed to have stabilized after some nasty June selling, and energy, the hottest sector of the year, which saw heavy profit taking in June and July, is now stabilizing and showing signs of new buying.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This points to the fact that there are no real areas of weakness now. I see only areas of relative strength.
On that note, the next table shows the sectors ranked in terms of strength to weakness. What I find interesting is that technology and discretionary stocks are on the rise. As you’ll notice below, tech, materials, and discretionary are among the highest rated stocks for fundamentals, yet they’re at the lower end in terms of technicals. This indicates technical weakness on fundamentally superior stocks.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Perhaps value hunters are stepping in and starting to lift those stocks higher. As they continue to do so, I expect those sectors to rise in the rankings. That’s important because tech, discretionary, materials, and industrials were the strongest sectors for much of the past few years. If they continue to be perceived as engines of growth and collect capital, that sets up for a great fourth quarter and 2023.
So, with a limp finish for the markets last week, should we turn bearish again? I believe the answer is no. The data is strong in too many respects. The BMI went from oversold to overbought in fast order, which indicates bullish forward returns for a week, month, three months, and a year. There is money flowing into stocks and ETFs. All sectors are strong with no signs of weakness. And growth areas are strengthening.
Does that mean the bear market just vanished into thin air? Maybe there’s a positive interpretation to this famous quote: “The greatest trick the devil ever pulled was convincing you that he doesn’t exist.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Winter is Coming, and Europe May Freeze
Income Mail by Bryan Perry
With Crosscurrents Galore, the Market Takes a Step Back
Growth Mail by Gary Alexander
Good News! The Future Will Be Full of Surprises
Global Mail by Ivan Martchev
All-Time High Close in EU Natural Gas
Sector Spotlight by Jason Bodner
Is This the End of a Bull Market – or a Normal Pause?
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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Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.
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