by Jason Bodner
December 12, 2023
Time distorts perspective. Most of us have heard of the Pony Express – that romanticized mail service of the 1860s. Many think it lasted for years, but it turns out that the Pony Express only lasted 18 months and it was a colossal financial failure, losing $13 per letter in today’s money!
The same phenomenon happens when we look at our brokerage accounts. Our down periods feel like they last forever, and our good times never seem to last long enough. Well, I hope you’ve been enjoying the market’s recovery. The three-month swoon from July 31 to October 30 has given way to a flood of capital back into stocks. November was one the best months in the last 30+ years for the S&P 500, but you had plenty of data on your side to tell you that this might come. The Big Money Index (BMI) went oversold in late October, and once it fell below 19, I showed you how that 100% of the time (since 1990) stocks were higher after 1, 3, 6, 9, and 12 months. In fact, I showed you this table on October 31:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, the numbers are in, and with November’s stellar performance, the 1-month statistics remain “undefeated” at 100% wins. It is interesting to see what led us higher since then. I highlighted (below), the indexes that surged by 10% or more. There is a common theme here – growth and small caps:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, when that table went out, on October 31, the BMI was below 19%, meaning that 19% or fewer of all unusually large trading signals were buys. At that time I predicted a rise, and look at how things went from there: The BMI is now over 70%, and it shows no sign of slowing down:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This euphoria could feel a bit disconcerting, as in – “oh no – here we go again.” It would be natural to be wary of another downdraft in stocks – especially after such a meteoric rise. That’s because the Big Money Index is now headed towards overbought territory. But it is important to understand that it’s not so much when the BMI goes overbought as when it falls from overbought. A perfect way to illustrate this is by looking at the BMI during COVID. As the world entered lock-down, the BMI fell like a rock. Then, we all remember, a spectacular rally followed. Within a few weeks, the BMI went from oversold to overbought.
If traders had dumped stocks as soon as the BMI hit overbought, they would have missed out on huge gains. In 2020, the BMI stayed overbought for a stunning 87 days! Only when it fell from overbought did we enter a sustained period of volatility:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We can also see how the selling evaporated and gave way to significant buying. On the left, we see that unusual buying in stocks spiked significantly in November. The same is seen for ETFs, on the right.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
What’s conspicuous is the lack of red bars lately, indicating that the selling has almost vanished:
Since the rally began in November, the inflows were focused on small-cap and mid-cap stocks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
These observations help contextualize that this rally is real and could last for quite a while.
Now, let’s look at the leading sectors. What is interesting is that we see growth areas collecting capital, the seeds of long-term bull markets. Tech, Discretionary, Industrials, and Financials powered this rally. Perhaps the biggest surprise is Real Estate surging nearly 17%. This is a mean reversion phenomenon, but it also highlights the fact that investors feel that rates have peaked and will potentially fall next year.
REITs (which litter the Real Estate sector) are legally required to pay out between 70% and 90% of their profits in the form of a dividend. This typically gives the sector an enticing place to find yield. Yet as rates rose of late, the sector became less compelling. Also, with real estate development in question, the sector became undesirable. Yet now, here we are with a massive rally as rates seem certain to head lower.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Looking at the distribution of buying and selling on a sector level, we see very constructive action. Nearly every sector (9 of 11) has seen notable unusual buying. Tech, Discretionary, Industrials, and Financials lead the way in terms of buying. We can also see a surge in Materials and the aforementioned Real Estate:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As for the two sectors not seeing buying, Utilities haven’t seen much, but remember the sector is small, when considering the number of stocks that make it up. That leaves us with Energy. As you can see, it’s the only sector that has seen notable selling lately. But this is also a bit of mean-reversion, as it was such a big out-performer for so long. It doesn’t help the sector that the price of oil has fallen 24% from a peak of $93.68 to $70.86. Still, what hurts energy investors helps the consumer. The price at the pump is falling, which means more discretionary dollars. Should this trend continue, it could further fuel a growth rally.
Lastly, it is pretty much a consensus that the Fed is done raising rates. With rates set to fall in 2024, and a major rally underway, we see a potential setup for a massive rally to develop. We’ve already witnessed a nearly 10% rally in the S&P 500 and more in the growth-heavy NASDAQ and Russell 2000 indexes. Should this continue, as we have every indication it will, the question is how long? History suggests the market might rally through April, or longer, as we can see on this historical performance chart since 1990:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Should this happen – as rates fall – we could see an immense FOMO trade (Fear of Missing Out) develop. When safe money market accounts no longer yield 5%, at the same time that stocks are staging a huge rally, with economic dark clouds behind us, investors will clamor for the gains they missed in stocks.
Time will tell, but I see this coming rally as a distinct possibility – or even a likelihood.
“The only thing you have control over is perspective” – Chris Pine
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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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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