by Jason Bodner
September 26, 2023
I’m lucky. I don’t get seasick. I once found myself on a 90-foot sailboat in the Gulf of Mexico. In my cabin, as I lay in my berth, I saw a star swing madly from above to below my porthole. This happened all night long as we navigated 8-foot swells. I held myself in bed by anchoring the nightstand and rolling against the waves. But I never became nauseous. It felt like a very long amusement park ride to me.
I told this to a friend once and he said: “I’m getting seasick just thinking about it.” Ironically, that’s true: Studies have shown that people prone to sea-sickness can get sick just by thinking about it.
Many investors might look at recent market volatility and feel seasick. I don’t blame them. Just looking at the broad indexes over the course of the past week, the market is thrashing about like that sloop I was on. The NASDAQ dropped an ugly -3.5% while the small-cap heavy Russell plopped down -3.71%. Yuck.
The good news is that market sickness isn’t a given. It’s not medical and is usually fear-induced. I am here to tell you that everything will be fine, for many data-driven reasons. Let’s begin with a reminder that, despite recent choppy waters, markets are up big time from their lows. In the chart below, we see various index performances over the last week and also since the October 12, 2022 lows:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That, at least, should help contextualize last week’s ugly performance. It’s also important to recall that growth led the way. Technology, Discretionary, and Industrials surged along with the smaller Communications sector. Also notice the NASDAQ 100 and PHLX Semiconductor index have been on fire, along with the growth-heavy Russell indexes. That’s the type of leadership we like to see leading from the depths.
You wouldn’t know it if you only looked at stocks or indexes over the past few weeks, but those exact same leadership sectors have been getting punished for weeks. Below, we see each sector in terms of outsized money flows. Technology, Discretionary and Industrials all saw heavy selling, joined by Staples, Healthcare, and most recently a big spike in Real Estate selling:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Utilities saw outsized selling, which we previously highlighted as an opportunity. Past instances of extreme sector selling often preface significant price rises. We highlighted this a few weeks ago for Utilities and the sector saw a +4.7% recovery shortly thereafter.
The fact is our data is littered with a strong theme of extreme selling prefacing rises in the overall market, ETFs and sectors. These concepts will be heavily detailed in a forthcoming white paper.
Usually, when capitulation rears its ugly head – it’s the bottom. So, what does that mean for us right now?
First, as I repeatedly state, August and September are the worst performing market months historically, at least since 1990, and 2023 definitely did not stray from the norm. The flip side is that October through December are the strongest months of the year. Here’s that chart, in case you missed it the first 50 times:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
From that perspective, we’re almost to the Promised Land! Let’s just get through this week… October is but a week away! For now, recent selling pressure in Technology and Discretionary have held those two leaders back enough so that Energy leap-frogged them into first place:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This makes perfect sense when you revisit the sector charts of outsized money flows. Only one sector has seen unusual buying of late: Energy. A +34% rise in the price of crude oil since June will certainly have that effect on energy stocks. Higher oil prices mean a higher profit margin for oil and gas companies.
So here we are, during the seasonally weakest month of the year, with a ton of negative news headlines swirling around. But let’s be honest with each other: Since when are news headlines positive? If they were, no one would read them. It’s a sad truth that media companies exploit doom and gloom for profit.
Currently, we fear inflation, interest rate hikes, the UAW strike and exploding bond yields. With the threat of higher rates, investors sell bonds in anticipation of higher yields and higher rates. Often, we see bond yields race higher and equities running higher with them. That makes sense: Sell bonds to buy equities.
But now bonds are being sold and equities are facing headwinds. So where is all that money going?
One clue is to look at money market funds. I have long said that there is $5.7 trillion in money market funds. Someone pushed back saying they read that it was only $5 trillion. Well, according to the latest release from the Federal Reserve (FRED, September 9, 2023) the number is actually closer to $6 trillion:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
So, we have a seasonally weak month, with both bonds and equities being sold. This sets up a time of potential stock capitulation. And we see compelling reasons to expect it, too. The Big Money Index has been falling steadily and now it sits at 38.8%, inching ever closer towards oversold.
That is quite bullish looking forward three, six, nine and 12 months:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It is possible that capitulation may have already occurred in some market corners. Below, we see heavy selling in stocks and extreme selling in ETFS. That has typically been a strong reversion signal:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I foresee a strong rally in the fourth quarter, and I believe it will be led by growth-heavy areas currently under pressure. (Think technology, semiconductors, discretionary, and industrials stocks).
For those you who suffer sea-sickness, I hear it sucks, but it’s not mandatory in markets. Keep an eye on the horizon like I did in that rocking ship on the way to Cuba. Navigate through the volatility.
Franklin D. Roosevelt poetically said: “A smooth sea never made a skilled sailor.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Fed Signals Another Rate Increase in 2023 (and No Cuts!)
Income Mail by Bryan Perry
Rising Bond Yields Stoke the Hunt for Maximum Income
Growth Mail by Gary Alexander
As We Approach $100 Oil (Again), Let’s Recall the 1970s Oil Crises
Global Mail by Ivan Martchev
Target for the Correction in Equities is Still the 200-day Moving Average
Sector Spotlight by Jason Bodner
If Volatility Makes You Seasick, I’ve Got the Right Antidote
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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