by Jason Bodner

September 28, 2021

Some things are obvious. In the first Polish Encyclopedia, Nowe Atey, if you look up “Horse,” you’ll find:  

Horse: Everyone knows what a horse is” (as translated from Polish to English, of course).

Horse

(Source: Meme-arsenal.com)

It’s hard to fault that logic. But to be fair to those from other cultures, who may have no clue what a horse is, it’s not a particularly helpful definition.

Here’s a definition I prefer, from Merriam-Webster’s Dictionary

To look a gift horse in the mouth: To look in a critical way at something that has been given to one.”

I’m telling you this because my data is obviously bullish to me, but not to everyone else. I still encounter many who are prepping for a market meltdown. I’m the first to concede that we never truly know what tomorrow brings. Anything can change at any moment. Markets may indeed break down near-term.

That’s my disclaimer, but I just don’t think that’s the case. Markets are going up.

To me it’s as obvious as what a horse is. And what a bull market is.

First, if we look at the Big Money Index (BMI), we see it is on the rise.

BIG Money Index Chart

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

The BMI is a 25-day moving average of all unusually large buying and selling of stocks and ETFs. Think of it as money flows. If the BMI falls, money is flowing out. If it is rising, money is pouring in. The BMI started its fall late January and finally troughed out on August 18th. It moves a little like an oil tanker. With a 25-day moving average, it takes days for some ugly selling to work its way out of the calculation. Yet even with last Monday’s significant selling, the BMI is still rising.

We see that echoed in the chart of individual stocks being bought and sold. Looking here, you can see that since March, buying and selling has been rotating in and out. It looks like a sine wave: BIG Money Stick Buys and Sells Chart

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

Ordinarily, we need a catalyst to lift the overall market. Notice in the charts above I overlaid the BMI buying and selling against the IWM ETF which tracks the Russell 2000 index. This is because the data I look at looks at each stock as its own individual entry.

The story looks very different when I overlay the same data against the S&P 500 (SPY): S & P 500 Big Money Charts

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

Notice how the index just kept rising since March, while the IWM flat-lined? As I explained last week, that’s because the S&P 500 is cap weighted. It assigns more importance to bigger stocks. The top five stocks (1%) are worth over $9.3 trillion (23%) out of the SPY’s total market cap of about $40 trillion.

The cap weighted method doesn’t work so well in terms of assigning importance to wealthy persons. If we asked the founders of these companies – Jeff Bezos, Bill Gates, Jeff Zuckerberg, Sergei Brin, and the late Steve Jobs – their opinions on political issues – would we give their answers 23% of the weight of all votes in America? We don’t weight political votes by wealth, so why weight stocks by wealth. That’s why, on a data level, I look at a larger number of smaller companies – the Russell 2000 Index (IWM).

The comparison of the S&P 500 and the Russell index clearly tells us that money has been moving into the biggest stocks, and not necessarily into the rest of the market. So why then am I bullish?

Well, recently we had an ETF dump. When selling in ETFs hits a high level, market troughs are often put in near-term. I put prior instances in orange boxes. Notice the two most recent times (thin orange lines): BIG Money ETF Buys and Sells Chart

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

To me this indicates near-term lows are in.

Now let’s address last Monday. The market fell hard due primarily to Chinese real estate fund Evergrande’s imminent default. Headlines placed focus on China growth slowing fears and uncertainty over a leveraged Evergrande blowup. It led to more selling than buying last week.

But notice a few things:

1) Industrials led the week’s sells:

Big Money Sector Table

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

2) We also saw noticeable selling of large caps:

Big Buying and Selling By Market Cap

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

3) But Monday was 43% of the selling for the entire week. Big Money Buy and Sell Table

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

This indicates that the selling was potentially “one and done,” like instances we saw in other charts, above.

What is different this time is what is getting bought. I am seeing buy signals emerging on many high-quality growth stocks for the first time in a while, or so it seems. I filtered through last week’s 239 buy signals and found that 85 (35%) of them exhibited superior 1-years sales growth and 52 (22%) had both superior sales growth and were profitable. That says to me there is an undercurrent of demand for quality.

I’m very familiar with many of these stocks and have not seen buy signals on these names in many months. Suddenly they are getting scooped up. Such a bid for quality is bullish. Bull runs are often sparked to life when leaders lead higher. I am excited to see buying in stocks like these.

Then there’s seasonality. We are about to emerge from a decidedly cruddy September. That was expected as it’s historically weak. But since 1990, October through December is a seasonally very strong time: Big Money Monthly Return Table

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

In summary:

  • Selling was swift and seemingly is done.
  • There is a bid for quality below the surface.
  • The large cap indexes don’t show the true sideways nature of the market like the Russell 2000 does.
  • The sudden demand for smaller cap growth stocks heading into a seasonally strong time of year bodes well for the types of stocks I like.

I’m bullish on growth. It’s as obvious as a horse to me but not to everyone.

As Sir Arthur Conan Doyle said: “There is nothing more deceptive than an obvious fact.”

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

Please see important disclosures below.

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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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