by Jason Bodner

September 29, 2020

Nature is full of deception. Blue jays mimic the sound of hawks. They do it near bird feeders to scare off natural prey of hawks who would otherwise eat from the feeder. That leaves the blue jay all alone to feast.

Clever, eh?

Blue Jay Image

Well, beware of market deception, too.

Last week several of my industry contacts called the near-term bottom for stocks. Thursday, I had a chat about whether a bottom was in or not. The broad indexes rallied, particularly the QQQs (the Nasdaq ETF). Many thought we were out of the woods, but I learned long ago to wait until I have all the relevant information before I make a judgement. I didn’t have the full picture, but Wall Street is impatient.

My system doesn’t calculate each day’s data until the wee hours of the morning after the market closes.

Why? Because the models need to measure every share of stock traded, as reported to the tape. The law says that if shares change hands, they must be reported, but the data doesn’t always come in at the same time. The 4:15 pm published volume totals may change overnight. There are many reasons for this, but that’s why I wait for all traded shares to print. So, my models run at 3 am while I am dreaming.

Then I aggregate all trading days on the weekend, when the picture snaps into focus and I can analyze the week’s trend. Sometimes the data is glaringly different one day to the next, but that’s infrequent.

So once the trading day finished last Thursday, I revisited my chat about the market having successfully “retested” the lows. I noted that intraday the QQQs rallied as high as +1.56% but only closed +0.37%. That means they (the collective market) sold much of the rally away – and on above average volume.

That didn’t scream “market strength” to me, but then Friday gave us a fat rally, so I looked wrong. Was I?

Here’s why I think we may see some more volatility ahead: Basically, because the data says so, with this caveat: If I’m wrong and the market keeps rising, then I’m still happy and everyone else is happy, save the big bears, but if I’m right, it provides an even better buying opportunity later on. I like those odds.

So let’s look at the data: First, despite the rosy outlook for stocks last week, my data shows Big Money selling. When markets reverse upward, I like to see buy signals. Last week saw the opposite. No real buyers were anywhere. We can see that with the weekly totals: 437 Big Money Sells and only 53 Big Money Buys.

I also like to see sector leadership from a market bottom. No sector is clearly emerging yet. The best I can say is that Tech did not see any major pressure – not a confidence builder for a renewed bull.

Selling was dominant in the following sectors: Staples, Healthcare, Communications, Financials, Utilities, Real Estate, and especially Energy. When 25% or more of the sector universe is bought or sold, it goes yellow. That’s our data saying, “Look here! Something is happening in this sector!”

Notice the yellow only appears in the SELL column?

MapSignals Sector Rankings Table

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

You may say: “But the SPY rallied +1.9% from Wednesday’s close, and +2% from the intraday low!”

OK, let’s examine that.

There’s volume, and then there’s VOLUME, meaning there are different ways to display volume.

I downloaded the following SPY data from Yahoo Finance and saw more volume on the down days:

SPY Volume Table

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

Looking at the screenshot below, one might think: Friday’s rally was above average volume – a clear sign of “real buying,” and you would be sort of right.

Standard and Poor's 500 ETF Trust Index Chart

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

It turns out that Yahoo Finance calculates “average volume” by using the last 63 trading days’ worth of data. There are an average 252 trading days per year (no weekends or exchange holidays), so 63 is exactly 25% of 252 annual trading days and the last 63 days are mainly lower-volume summer days. Therefore, Yahoo uses a 3-month average daily volume, or 68,877,203 shares per day in this case.

It is far more common for traders to use recent events to make their calculations, so we use a 20-day average (in this case, September trading days), which is 85,473,355 shares. So, Friday according to Yahoo was above volume, but according to Mapsignals it was below average volume.

My specific stock data monitors 5,500 stocks daily, ranking each for strength and weakness measuring fundamentals and technicals. Then it overlays a filter looking for unusually large volume and volatility.

When Big Money moves into and out of stocks in any unusual way, it sends a flag. The 5-year average daily Big Money signal (yellow flag) is 561. Those signals can be further narrowed down to when there’s likely huge buying on higher prices or selling on lower prices. That happens to only about 100 stocks/day.

Narrowing Down Stock Selection Image

Next, let’s look at a more detailed table of SPY, with some highlighted information:

Standard and Poor's 500 ETF Trust Index Volume Table

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

Notice that down days are above 20-day average volume, and down and flat days are above average Big Money Signals, while Up days are below average. Only two days have above average signals.

The bottom-line is that my data tells me that we might not have seen the bottom yet. Election volatility is still on the horizon and Big Money activity is higher on down days than up days.

That points to potentially better entry prices ahead.

As Leonardo da Vinci said, “The greatest deception men suffer from is their own opinions.”

I try to avoid opinions in investing; that can be dangerous. I stick with data.

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

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
How the Greenback Conundrum Channels Harry Truman

Sector Spotlight by Jason Bodner
The Market is Full of Deceptive Moves

View Full Archive
Read Past Issues Here

About The Author

Jason Bodner

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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