by Jason Bodner

September 9, 2020

They say you need to be in the right place at the right time, but even that is not a guarantee of success.

For instance, there was a horse named Sham. He was a fast horse. In fact, he was the fastest of almost any Kentucky Derby entry in history. He ran the mile-and-a-quarter in just under 2 minutes (1:59.9). His time was good enough to win any Kentucky Derby, past or present, except the one he was in. In that 1973 race, he lost to the legendary Secretariat by about 2-½ lengths.

Kentucky Derby Image

To this day, 1:59.9 remains the second-best time in the 145-year Kentucky Derby history, since 1875.

Timing in stocks seems like it’s everything, too. Only it’s not – not in the long-term.

Long run, it makes little difference if you buy outlier stocks at the annual top or bottom price. Even if you buy them near their cyclical tops, the outliers still outperform all else. So says 100 years of history. Dr. Hendrick Bessembinder’s paper “Do stocks outperform Treasury Bills?” found that only 4% of all listed stocks account for 100% of stock market gains above Treasury bills since 1926.

So, in the long run, you can feel good buying an outlier stock on any old day, whether the market is up or down. Still, getting your near-term timing wrong can feel really aggravating.

Many traders must feel that way over this long Labor Day weekend, so how can we everyday investors in outlier stocks refine our timing to get better entry points on great stocks?

It helps to take the temperature of the market. Looking at stocks on Wednesday last week versus Friday would have given us two very different readings.

As I have been saying, the indications have been telling us for a while that a healthy pullback is in order. I’ve been writing about overbought conditions in stocks for months. In fact, when I called a market bottom for March 20th and missed it by one day (Monday, March 23rd was the actual bottom), the buying started and really hasn’t stopped since then. That said, the Big Money Index has been steadily falling from its recent peak. The latest period of 84 days overbought is now the record for our 30-year history.

Finally, we fell out of overbought:

MapSignals Big Money Index Chart

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

The peak in buying may have finally come… Wednesday saw immense buying, so much so that my research company wrote about “Animal Spirits.” That’s the Keynesian term for when emotion takes over in place of logic and drives behavior, according to John Maynard Keynes, who coined the phrase in 1936.

Prior to Thursday’s and Friday’s respective sell-offs, investors were high fiving each other, as many accounts hit all-time highs. The news has no shortage of stories about the fantasyland disconnect between the stock market and the COVID-plagued economy. But media debates don’t matter; prices do.

When buyers want to buy, they’ll buy, but at some point, things become unsustainable. One great indication of a blow off top is when ETF buying gets crazy, so I’ll say it clearly for you:

There is a clear inverse relationship between heavy ETF trading and future market prices.

Let’s examine what I mean. Below you see a chart of ETF buying (green bars) and selling (red bars) overlaid against the S&P 500 index. Two things should jump off the page at you:

  1. When there is immense selling, it typically lines up with market troughs.
  2. When there is immense buying, it typically lines up with market peaks.

MapSignals Big Money Exchange Traded Funds Index Chart

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

In case you’re wondering, Wednesday saw immense ETF buying. In fact, there have only been 10 trading days in 30 years with 70 or more ETF Big Money Buy signals. Wednesday was one of them.

So, if huge ETF buying means lower prices ahead, what does that look like? I looked at all 10 times that there were 70 or more ETF buys in a day and plotted the forward returns of the S&P 500 Index out 1, 3, 6, 9, and 12 months. In doing so, it’s worth noting that September of 2012, January of 2018, and June of 2020 accounted for seven of those 10 days, so it may be a stretch to rely on this data set as any real indication. In any event, the forward returns were negative for 1 and 3 months ahead, then positive.

Exchange Traded Funds Buys Table

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

Lastly, heading into Thursday morning, there was a “shock and awe” level of buying in stocks. Eight (and nearly nine) of the 11 S&P sectors saw noteworthy buying as highlighted in yellow below. That buying stopped Thursday, which brought out some sell signals, mainly in Energy and Communications. The monster selling in big tech that we saw hasn’t created much in the way of sell signals, because the stocks were at such lofty highs. We need to see some 3-month lows pierced to see big tech sell signals.

MapSignals Sector Rankings Table

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

This is what I think: This sell-off was a much-needed return to earth move. Stocks got crazy as day-traders saw riches ahead, and sellers were nowhere to be found. It’s healthy to see some red in a sea of green. The longer things go one way, the uglier the comedown will be.

When it looks like stocks and active traders all drank Willy Wonka’s Fizzy Lifting Drink, they had to burp; otherwise they would get shredded by the big fans, just like in the movie.

There are bubbles popping with nosebleed P/E valuations getting hammered down. But earnings reports are still working great on outlier stocks. They are what you want to bet on in both up and down markets.

Back to timing: The BMI is falling, sell pressure is showing up, and stocks are correcting. The last time we saw a swift fall like this was in June, and no one really had time to “buy the dip.” If you’ve been waiting on the sidelines, patience pays off to deploy cash as this epic buying finally takes a pause. Deals will surface and having a buy list ready of the best outliers waiting for a sale is a great way to time buys.

As for what comes next, in the wise words of Willy Wonka: “The suspense is terrible. I hope it’ll last.”

Willy Wonka and The Chocolate Factory Image

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
Why Lumber and Stocks Dance Together

Sector Spotlight by Jason Bodner
Timing Your Next Buying Points

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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