September 17, 2019

Sudden shifts happen in nature. The hairy frog cracks its toe bones and creates sharp claws when threatened.

I have a simple rule: To know market direction, follow big money. When it shifts on a dime, pay attention.

Last week, I said, “With last week’s data, I might be changing my tune to short-term bullish.” While I prepared two weeks ago for a -5% market dip, the data suddenly changed, saying big money was buying. And when big investors buy, it often precedes a bull-run. First, the data said, “Prepare for turbulence,” but then it shifted quickly. Looking at thousands of stocks every day, I’d say, when the data shifts – you shift.

I’m glad we did, because the market ripped, with big money buying, specifically small-cap domestics.

Look at this chart:

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

Into last week, selling outpaced buying for five straight weeks. Typically, selling is clumpy and lasts a while. Then, it dries up and buying grows. Then, the cycle repeats constantly.

What a Buying (and Selling) Surge Looks Like

What does big buying and selling look like?

My research firm looks at 5500 stocks each day. We use algorithms to sift through data and pinpoint big investors (pension funds, hedge funds, etc.) moving money in and out of the market “abnormally.” For simplicity, that means when a stock’s volume and volatility spikes, that creates “signals.” In a normal up-trending market, we expect more big buyers than sellers. That makes sense and looks like this:

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

But when selling comes and takes control, it looks like this:

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

We expect downward market prices. What’s cool is that this selling often foreshadows a fall, meaning, selling can happen under the surface while big investors dump stocks, but indexes can still rally for a while. I’ve seen it time and time again. That’s why it’s crucial to watch what the biggest investors do.

As Louis Navellier says: “You’d rather be the nose of the dog than the tail.”

A couple of weeks ago when the data said we should expect a 5% dip, it was good to be ready for a dip. But the dip didn’t come and what came was big buying – from nowhere. This was the shift last week:

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

This new information said buyers were here and we should expect “up-volatility.”  We saw the Big Money Index stop falling and reverse:

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

Last week’s buying was “bigly.” The story changed when buy signals started last Wednesday. Since then, the Russell 2000 ETF (IWM) rocketed +6.2%! This resembles a huge unwind, a wicked reversion.

The table below shows where the big buying and selling was. The yellow shows when 25% or more of a sector universe was bought. That’s big buying! Tech, Industrials, Discretionary, Telecom, Financials, Staples, Real Estate, Materials, and nearly Health Care (at 24%) saw abnormal buying, with Utilities also close, at 21%. That’s almost the whole market. Energy’s levels are so depressed that we need higher prices first to make technical buy signals, so don’t expect a clean sweep of all 11 sectors just yet.

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

But look at the lone yellow sell, in Technology (26%). How can we have both buying and selling in one sector, tech? It was a “rotation” in and out, all in a week. There is an unwind in some high-flying stocks. The media calls them “momentum stocks,” aka high-beta stocks. These stocks significantly outperform a benchmark index. Imagine XYZ stock is +40% while the S&P 500 is +20%. That’s a beta of 2.0, a high-beta stock. Software has been a major winner these last few months. The group has some of the best stocks out there, until last Monday, that is. Nearly 70% of Infotech’s recent selling was in software.

So, the reversion hypothetically looks like this, to a money manager. I’m heavily long high-beta stocks because they outperform. As a hedge, I short stocks that underperform in the same growth area. I thereby maintain balance in my portfolio, being both long and short stocks. Suddenly, something changes, and traders liquidate high-beta stocks to cover shorts. The crowded trade causes a dash for the exits.

Last week was clearly a case of “sell software and buy small caps.” When you realize that’s happening, the algo traders already ate your lunch. The computer-based trading firms react in nanoseconds, not hours or days. Humans can’t compete. Forced liquidation happens, preserving gains or stemming losses.

But nothing is wrong with many Software stocks. They were this year’s biggest winners. When you need profits, you sell the biggest winners, especially if they’re dropping fast. Many are awesome companies. Imagine an LED on your home’s front-door, stating its value. Monday it says, “value $500,000.” Tuesday it says, “value $400,000.” Why? Your house is in the best neighborhood with no crime in the best school district. The fact that your neighbor fell on hard times and must sell shouldn’t affect your house’s value, right? But that’s how it is in stock markets, so be on the lookout for deals, because they are out there.

Two weeks ago, the data said, “Expect a drop,” but the data quickly changed. The smart investor will adapt and survive. As Stephen Hawking said, “Intelligence is the ability to adapt to change.”

Disclosures

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives

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