by Jason Bodner
January 9, 2024
In my 20s, I had more New Year’s Day hangovers than now. I’ve learned since then that it’s not how much you drink but how often (or seldom) you drink that determines the hangover’s Richter scale.
Numerous studies suggest that hangovers hit light or moderate drinkers harder than heavy drinkers.
Sufferers may say: “OK, smarty pants, whatever you say – but how do I fix it now?” Some opt for the “hair of the dog that bit you” formula, a Bloody Mary. Back in the day, I favored an egg, cheese and a truckload of water. Either way, too much late-night fun drinking is usually followed by morning unfun.
And so it goes for investing, too…
The much-toasted New Year of 2024 is here, and the go-go fourth quarter of 2023 sits squarely in the rear-view mirror, so if you want to know what a market hangover looks like – it’s this: Nearly all Red.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Small-cap stocks sagged, tech stocks sucked wind, and semiconductors got smoked. Only six of 27 indexes in this table were positive, and they were defensive ones: utilities, staples, health, and energy.
Compare this to what we saw since October 26th lows, and the departure is obvious:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Nearly every tracked index surged since October 26. Of the 34 U.S. stock indexes I track, only one was down, barely (energy, after being up strongly), and only four others had single digit positive returns.
Maybe market traders drank too much in Q4, so let’s contextualize the first week of 2024. The data helps us know where we are – and where we might go.
First, the Big Money Index (BMI) is heavily overbought, so was this correction right on schedule?
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Well, first off, I’ll remind you that the BMI can stay overbought for a long time. What matters more than being overbought is when it first falls from being overbought, which could be anytime. If selling rips through the market, I’d expect it to fall, but if buying picks up again, we could stay overbought for weeks.
Second, as I write this on Friday, January 5th, we’ve only had four trading days thus far in 2024, with three down days followed by an up day. Not a huge sample. I’ll tell you this: When I worked on Wall Street, I rarely worked right after New Year’s Day. When I did, it was because I was a junior staffer, or I drew the short straw. Experience tells me that most senior traders and portfolio managers are salvaging their ski vacations or are squeezing out the last drops of winter break before their kids go back to school. (That’s what I did: My kids were at home last week, so I’d say the trends of Week #1 are no big concern).
Next, let’s check unusual trading volumes. Let’s begin with unusually large trading. We should expect that January would see a bump in volumes that slow down going into Christmas and New Year’s. That’s what we see here. This makes sense, since portfolio managers reposition, and many investment companies require capital deployment in the New Year. Remember: Managers don’t make fees holding cash.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Looking at unusual buying and selling of stocks and ETFs, however, we see something different:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Notice the shallowness (or near-absence) of green and red stalks at the far right. This indicates no major exit or entrance from the market but a rotation out of leading sectors and into lagging ones.
To confirm this, we simply consult the tables for the various indexes. Take semiconductors as our prime example: The group fell 6.4% after soaring by nearly 32% from October 26th to New Year’s Eve.
This is echoed in the Semiconductor Holders Trust (SMH) ETF:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Look at the recent green bars, indicating unusual buying. The latest price drop, however, has no red bars. This indicates a normal healthy pullback, and not necessarily a bend in the trend.
Keep that in mind as we look at sector index charts (using ETFs as proxy). What jumps out at me is the absence of any significant big buying or selling. (Health Care and staples are the only small exceptions).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Another interesting New Year’s phenomenon in my data is that sector strength and weakness seems to reset each year in my database. This is due to my stock scoring model being a year-to-date performance measure. The metric is nearly complete at end-of-year, but in the first days of each year, there is no real YTD performance yet, so it immediately yields some very different leaders/laggards from last year:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This may seem like flawed logic, but it can be very useful to reset each year. After all, don’t we all like to reset some of our annual goals with each New Year’s and the inevitable resolutions?
This phenomenon is particularly useful in presidential election years, like 2024.
Expect a Slower Start (but Strong Finish) in a Presidential Election Year
My research firm just studied market returns in the first quarter of presidential election years. Overall, we can expect a good year most years. Since 1980, the S&P 500 has averaged 10.3% annually. Looking at Q1, it historically averages +2.07%, while Q2 – Q4 accounts for 8% gains, but this is only the average.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When it comes to presidential election years, the results since 1980 are lower, especially in the first quarter. I looked at each election year since 1980. To summarize, stocks get sold early in the year and bought later on. This makes sense, as investors hate risk and would rather sidestep any major surprises.
There were 11 prior presidential elections since 1980. Historically, stocks are weaker in election years but January – March is typically when most of that weakness occurs. It turns out election Q1’s fall -1.49% versus the usual +2.07% since 1980, but Q2-Q4 average a stellar +8.06%, slightly better than the 7.96% average.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
To me, this means last week’s dip is on schedule in presenting an opportunity to buy great stocks on sale. Add this to the many reasons I outlined for a bullish case – a few being:
• Record cash on the sidelines of $6+ trillion
• Above-average short-term rates (5%+) versus falling inflation (c. 3%)
• A falling 10-year rate (peaking at 4.997%, now at 3.97%)
• The recession that never came…and
• Growth sector leadership
I’m bullish for 2024, despite election year history since 1980.
As far as elections go remember Mark Twain: “If voting made any difference, they wouldn’t let us do it.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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Two Lagging Income Sectors in 2023 Look Like Winners in 2024
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Three Major 2024 Challenges Emerged in Week #1
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Why No Santa Claus Rally for the S&P 500 in 2024?
Sector Spotlight by Jason Bodner
Will the Recent Market “Hangover” Last Through March?
View Full Archive
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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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