by Jason Bodner
September 17, 2024
This is an exciting time for stocks.
It may not be as exciting as when the whole idea for a stock market started more than 400 years ago! That was in 1602, when the Dutch East India Company issued shares, which led to the creation of the oldest stock exchange, the Amsterdam Exchange, now known as Euro-next.
But today’s market is exciting, all the same. And that’s because we are on the precipice of a policy change at the Fed this week. Interest rates are set to commence a retreat, for the first time in years.
The market is already showing signs of pre-digesting this rate change. This week, I’ll go over some of the tell-tale signs that the market is prepared for lower rates, and I will also show you why the data of unusual buying and selling reveals bullish signs ahead.
So, let’s ignore the rhetoric, the pundits, and the headlines bent on spreading fear. Let’s lock in on the hard data and look towards the horizon. I assure you that it is a bright one.
What the Big Money Index is Telling Us Now
My favorite place to begin is with my old reliable indicator, which has to do with unusual money flows. The Big Money Index (BMI) measures unusual institutional money flows over a 25-day moving average. Here, we can often get a sense of what the big investors are positioning for, in terms of risk appetite.
History tells us that during election years, September and October are often weak. And this September certainly started out that way, but – as we saw in August – much can change in a week’s time. As we can see below, since early September’s weakness, money has been flowing into stocks. And the latest uptick in the BMI is a convincing one. The BMI just reached five-month highs, not seen since April of this year:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is reinforced when we drill down into the daily unusual buy and sell counts. We see that some moderate selling took place early this month, only to be replaced with steadily increasing buying:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is great news. We should always prepare for weak and volatile Septembers, and bumpy Octobers during election years. But we should also welcome a nice inflow of money into stocks.
Volatility is not always a matter of stock prices falling. While the term has become synonymous with gut-wrenching drops in stock prices, volatility just means that things are moving around a lot – up or down.
The New Leading Sectors in Late 2024
This year has shown massive volatility that is not necessarily visible in the overall indexes. Some of the most wicked volatility is happening as sectors rotate and jostle for higher places on the totem pole.
This sector volatility is very evident in this graphic of sector leadership year-to-date:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The familiar engines of the bull market for years were tops of the charts at year-end 2023: Technology and Discretionary. If you would have told me then that they would fall to #4 and #7, to be replaced by Utilities and Real Estate, and the market would be up, I would have been shocked… for a minute. Then I would realize that interest rates were bound to fall. In fact, I’ll admit, I thought rates would fall in late 2023 in my most aggressive model. As rates are set to fall next week, stock investors have been preparing.
Looking below, we can see sizeable inflows into Utilities, Financials, and Real Estate. Utilities, and Real Estate are attractive places to park capital in a falling rate environment. Gone are the days when you can hide in money markets and earn 5% doing nothing. Rates are set to fall, and the market knows it. In fact, the average mortgage rate just dropped to a multi-year low. Utilities often pay a hefty dividend. And Real Estate stocks, as REITs, are required by law to pay between 70% and 90% of net profits in dividends. And Financials are major beneficiaries of lower rates and M&A activity ramps up, as does lending in general.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Technology is still muddling through a choppy period. Large-cap technology stocks are doing well but have been priced for perfection. Any language not overly rosy in forward-looking statements can impact its share price.
Clearly, the weakest sector is Energy, as oil prices have sunk 23% from their April highs.
Revisiting Utilities for a moment, the unusual buying of individual stocks can lift an entire sector. The chart on the left reflects individual buys and sells. The chart on the right shows the XLU (SPDR Select Utilities Sector ETF). As you can see the unusual buying is helping to push the sector ETF higher.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
So far, the data is pretty rosy, but to continue this picture, I have found two extreme readings in the data over the last few weeks, and they both point to greener pastures. On August 5th, we logged a huge day of unusual selling: 374 stocks and ETFs were sold unusually that day. That was followed by August 30th seeing a big day of unusual buying, logging 170 buys, as shown in the daily log below:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I wanted to see what these extreme days meant for the near future, historically speaking, so I looked for days of selling equal to or greater than August 5th, and days of buying equal or greater than August 30th.
I found that these are both rare events:
- There have only been 76 days with selling of 374 or greater since 1990 – or 0.87% of the time.
- There have only been 240 days with buying of 170 or greater since 1990 – or 2.75% of the time.
In each case, the forward returns were strong. Heavy selling days prefaced higher absolute returns long-term, but both profiles were strong, with high percentage of positive returns:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Summing up, the news still sucks (as usual), and the election is exhausting us all. But when we focus on the data, we see that there is much to look forward to. Don’t forget that, as rates fall, small- and mid-cap stocks tend to be great beneficiaries due to the falling costs of leveraged financing.
Let’s focus on identifying winning stocks within each sector. Currently Utilities, Financials, and Real Estate are the new leaders. My game plan is to focus on these sectors and look for smaller and mid-sized companies with strong fundamentals that will lead their respective sectors higher.
As legendary bond investor Bill Gross said, of bonds: “It’s sort of like a teeter-totter; when interest rates go down, prices go up.” Well, that same formula goes for most stock prices, too.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
We Barely Dodged World War III (Again) Last Week
Income Mail by Bryan Perry
The Rally That Nobody Saw Coming
Growth Mail by Gary Alexander
Debaters Dodge Deficits (and Growth, and Lots More)
Global Mail by Ivan Martchev
A Fresh All-Time High in the S&P 500 Likely This Week
Sector Spotlight by Jason Bodner
September 18th Creates a Turning Point for Stocks
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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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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