by Jason Bodner

August 24, 2021

It’s our nature to want to know what comes next.

I saw The Fugitive in the theater (remember theaters?) with my mom.  She figured out the mystery villain before I did. She couldn’t control herself and screamed, “It was Chuck!” Groans escaped from annoyed moviegoers who weren’t as sharp, because they wanted the pleasure of resolving the mystery themselves.

Maybe that’s why the leading theory about why humans love music is because we like to predict what’s around the corner. The theory goes that we learn patterns by listening to music. We unconsciously try to predict what comes next. When we’re right, our brain’s pleasure center gets a jolt of dopamine.

The theory is that our brains are deeply wired to get a rush from expectations and fulfilled outcomes.

Listening to great jams or an awesome operatic aria is one thing, but dopamine seems to be amplified when it comes to our wallets, since the market is one massive game of expectations vs. outcome.

Traders are like skydivers or thrill seekers – they want the quick rush that comes from a big win – while investors are more like sculptors, patiently molding their creation to find pleasure from the journey.

Either way, it’s in our nature to want to know what comes next in the market. A short-term trader wants to know what comes by the end of the day. A long-term investor like Warren Buffett already knows what’s coming. The tradeoff is that he must wait for years for the certainty to fulfill itself, which it usually does.

Over 100 years, we know stocks have historically risen to epic heights. Give them 100 more years and the odds are that any current volatility will look like wee bumps from our future lofty view.

But, we tend to be impatient, and we don’t have 100 years. It takes a strong mind and willpower to be patient, especially when it comes to money. For example, I once spoke to a crowded room, where I told attendees that if they bought the five stocks that I discussed that day and held them for 30 years, they’d likely be rich. Someone yelled back – true story, I kid you not – “I don’t have 30 years; I have 3 months!”

In his honor, I’ll answer both the short-term and long-term questions about what comes next for stocks.

SHORT-TERM – Look for More Downward Volatility

Stocks have been getting sold with growing intensity. In July, I forewarned you of volatility. It arrived on schedule, and we are in the throes of it. Last week’s sector action reflects my anticipated August swoon:

MapSignals Sector Rankings Table and Bar Chart

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

Last week, 8 of 11 S&P sectors (those in yellow) saw more than 25% of their universe of stocks which I track sold. In addition, Real Estate air-kissed 25%, so we can make it 9. Financials also saw more selling than buying. The lone sector that saw capital inflows is arguably the safest haven during corrections: Utilities.

“What swoon?” you may ask. If you’re a passive index investor looking at the S&P 500, you’d be right to say that. The S&P 500 finished last week down just 0.6%. That’s hardly anything to fret over. But there is a big decoupling going on. The main indexes are strong while there is significant deterioration under the hood. Selling in growth stocks has been happening for weeks now. And last week it spread to the sector selling we see above. In addition, the Big Money Index has been falling for several weeks now:

MapSignals Big Money Index Chart

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

Ordinarily, action like this precedes a market correction. That’s why I have been near-term bearish. When big investors sell more stocks than they buy, indexes normally head lower. We can see that here when we overlay pink areas where the BMI was in a sustained downtrend – days where the 10-day average for the BMI was below 65% (the 30-year average). Notice how pink lines up with sideways or falling prices:

Sustained Lowering Big Money Index Chart

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

Continuing our visual journey, below we see a simple measure of the BMI. I looked at times when the 25-day BMI was rising for a majority of the time. If the BMI is rising at least 30% of the days, then it’s green. If 70% of the time, the BMI was falling, it’s pink. Here is the result over the last 30+ years:

Big Money Index 25-Day Trends 1990 - Present Chart

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

We see that for more than 30 years, the pink spots (where the BMI is falling more than 70% of the rolling 25-day period) will line up with mediocre or lower market prices. Let’s zoom in on the years since 2005:

Big Money Index 25-Day Trends 2005 - Present Chart

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

Now, let’s zoom in a little more, since just 2015:

Big Money Index 25-Day Trends 2015 - Present Chart

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

Finally, let’s zoom into just the past 2-1/2 years, since the start of 2019:

Big Money Index 25-Day Trends 2019 - Present Chart

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

As a reminder, green means up and pink means down, so please notice that despite the strong broad recent index performance, we’re clearly in the pink. With this recent pressure on growth stocks now spreading to sectors, and a 25-day BMI trending lower, I believe the big indexes are headed for lower prices near-term.

That said, any pullbacks will be buying opportunities for quality stocks for the following reasons:

  • Interest rates remain low for the foreseeable future, with the Fed Funds Rate near 0.25%.
  • The economy is reopening despite Delta variant fears. The economy will eventually approach normal.
  • Sales and earnings continue to amaze: 87% of reporting S&P 500 firms beat EPS and sales estimates.
  • You can still earn more after taxes by holding stocks than bonds:

Owning Stocks Advantage Over Bonds Table

So, near-term the data indicates we should head lower. But that would be a great opportunity to snatch up undervalued outlier stocks.  That brings us to the final question: What do I expect for the long-term?

LONG-TERM – Stocks Will Go Up Again

Stocks will rise again. Let this 100-year chart of the Dow Jones Industrial Average sink in for a moment:

Dow Jones Industrial Average 100 Years Chart

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

So, to wrap up: Traders may want to position for near-term stock market pressure that spreads to the big indexes. My data indicates that should be the case, but I could be wrong; nothing is 100% certain.

For you long-term investor/sculptors, just accept that I could be wrong and buy stocks anyway, especially if you and your family have the next 100 years in mind.

While 100 years may seem too long of a long run, remember this quote by Henry David Thoreau:

“In the long run, men hit only what they aim at. Therefore, they had better aim at something high.”

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

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Money Supply is (Almost) All About the Fed

Sector Spotlight by Jason Bodner
A 30-Year (or 3-Month) Investment Game Plan

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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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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