by Jason Bodner
August 9, 2022
Bears hibernate during winter but that doesn’t mean they sleep the whole time. They just don’t eat or drink much and kind of laze around. The bears are always around, but they spend a lot of downtime.
That brings me to the looming question: Is this a bear squeeze or the beginning of a new bull market?
Given how the market has behaved this year, it may seem presumptuous to even utter the word “bull” yet. But worry is emotional, and I deal with cold hard data. Today, I’ll go over what the data says and how I think that sets up for the rest of the year. I’ll tell you straight up, the data has suddenly shifted, and it is very bullish. Let’s just work our way through it, top down, and you’ll see what I mean…
Our key indicator, the Big Money Index (BMI), most recently went oversold on July 14th. As you may recall me mentioning previously, this is one of our strongest indicators. When the BMI goes oversold, the forward returns are nothing short of spectacular. This has held true for the 32 years of data I’ve collected.
This “oversold” condition has only happened 22 times since 1990 and look at the average returns:
- 1 Month returns: +2.7%
- 3 Months +5.2%
- 6 Months +9.2%
- 12 Months +15.3%
- 24 Months +29.8%
We can see the details of each instance in this table below:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
So, how did we do since the latest occurrence on July 14? The NASDAQ tracking ETF (QQQ) rose 13.2%, and the S&P 500 tracking ETF (SPY) rose 9.8% in under a month, so the oversold BMI strikes again!
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
But is this a bear squeeze, or the start of a bull run? Moving to our next layer, we start to get a clearer picture. Keep in mind, the BMI is a 25-day moving average of all unusual buying and selling signals. If we look at these signals daily in the chart below, we start to see something interesting. We’re suddenly seeing the most buying we’ve seen all year. This buying started July 27th, and so far, hasn’t looked back:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We are even seeing buying in ETFs for the first time in a long time:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This starts to frame a picture that institutional and professional investors are legitimately stepping in and adding risk. OK, that’s great news, but should we really be excited? The past several years of stock markets have featured nasty rotations in and out of sectors. This has been happening in both up and down markets, so it begs the question: Does this buying really mean anything if other areas are being sold hard?
For answers, we’re going to check in on the 11 S&P sectors to see exactly where the money flows are going. To discern if any price action is bullish, we like to look at the worst performing sectors. This year, discretionary and tech stocks have been bludgeoned the worst. These sectors haven’t seen hardly any buying, but look at what we see in their charts… the first significant blue sticks of buying in a long while:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
If these two sectors on their own were the only ones seeing buying, I would be excited. The engines of any growth market are tech and discretionary companies, so buying in these two areas is encouraging, but it doesn’t stop there. We’ve also seen recent buy spikes in utilities, industrials, healthcare, and staples:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This puts more weight behind the theory of a new bull market forming. But what about the other sectors? While less significant, we still see buying in communications, real estate, and financials in their charts:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The only two sectors not seeing significant buying right now are materials and energy. But we can give them a break, because energy has been the strongest sector from the beginning of the year through this summer, and materials also had a strong showing. So, if they are taking a pause while big money flows into the other nine sectors, I’m not particularly concerned.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The price of crude oil has fallen below $90 a barrel. While that’s bad news for the explosive margins of energy stocks, that’s encouraging news for the consumer. Much of this wicked inflation that’s impacting the everyday American is happening at the gas pump. Should prices continue to fall for oil heading into a historically seasonal dip in the fall, then the consumer might get a little relief in the coming months.
I mentioned that the buying really started on July 27. We now know that shares in nine of 11 sectors are getting scooped up significantly. That’s solid! But now let’s look at what that distribution has looked like since July 27. In the chart below, we can see 80% came in five sectors: Industrials (20.6%), tech (19.2%), and healthcare (18.4%), with discretionary (11.4%) and financial (10.5%) also seeing strong buying.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I’d also like to point out that there has been notable buying in small and mid-cap stocks. Typically in a bearish tape, large and mega cap shares attract capital because they are viewed as more stable.
Small and mid-cap stocks are perceived to be more risky. But as you can see in the chart below we see sizable buying in the “risky”areas of the market.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Could this be a short squeeze? Sure, I must concede that as a possibility. In fact, I think it’s a given. But that in and of itself is a great sign. The market is a forward-thinking machine. I believe the realization is setting in for investors that perhaps the economy and overall situation are not as bad as everyone is making it seem. The case for shorts is dwindling as shorts cover their positions and stock-squeeze value hunters step in thinking there’s an “all clear” to buy. This can build a foundation for a new greed cycle of the market.
What I am seeing is risk being added in two once-beat-up sectors, tech and discretionary, as well as small caps, and broad buying across the rest of the sectors with the exception of energy and materials, which saw most of the buying throughout 2022 (while tech and small stocks were big winners in 2021).
This all sets up quite nicely for my theory of ghost tightening. The Fed used scary language to deflate asset prices, starting with tech shares and crypto. Then the margin debt bubble popped. I’ve written an extensive white paper on this subject. But as you can see in the chart below, debt had to reset in May:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
With much of the leveraging speculation out of the system, and clarity coming increasingly from the Fed, the setup is now positive. The labor market is strong. Sales and earnings are largely working.
Perhaps we’ll get that “soft landing” after all. Maybe the market already knows that – which is why Big Money has been buying. This might just be a “bull squeeze,” but that only reminds me of a favorite quote:
“The bigger the squeeze, the better the juice.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Jobs and Other Indicators Scream “No Recession Here!”
Income Mail by Bryan Perry
The Bulls Face an Array of High Hurdles in August
Growth Mail by Gary Alexander
Could Hyperinflation Ever Happen Here?
Global Mail by Ivan Martchev
No More Recession Talk for Now
Sector Spotlight by Jason Bodner
Do We Dare Utter the Words “Bull Market” Yet?
View Full Archive
Read Past Issues Here
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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