by Jason Bodner
May 21, 2024
As a kid, I would sometimes get mad at my mom for not letting me slide a little. If I came up short, she wouldn’t let it go. If I got a “C” on something she knew I could ace, I got skewered. Instead, I wanted sympathy and an excuse for coasting. Instead, I was pushed to be the best I could be. Lessons like that are essential to unlock true potential, she said. Contentment with status-quo results in being average.
Sports often show the reward for pursuing that extra edge of excellence. Kobe Bryant embodied it with his “Mamba Mentality.” He only wanted to be better than the day before. He said, “After years of that, you unveil the masterpiece.” Kobe stepped up when it really mattered. Consider that only two players had more playoff points than Kobe’s 5,640 when he retired, Michael Jordan and Kareem Abdul-Jabbar.
In this election year, we have a great opportunity. But it’s not as simple as just “buy stocks.” I’ll show you the nature of this opportunity. Then I will show you the value of focusing on the best stocks.
I always check the Big Money Index (BMI) first. It’s our indicator of money flows. Ultimately, money makes the world go around. After a cool April, the cup formation is just about complete. In the chart below, we see two prior instances in the last year when the BMI fell and then quickly reversed back up:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
On the surface, that looks great, but the BMI is propelled by daily counts of unusual buying or selling in stocks. That’s where we must look to see if the tides have shifted. We see a similar “V” showing how selling peaked, then vanished, replaced by steady buying. These are meaningful inflows:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
ETFs are great confirmation tools, as many of them are portfolios of stocks. Money managers buying ETFs filled with stocks means risk appetite is rising. Sure enough, we see ETF inflows too:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now that we know money is moving in, let’s see where it’s moving in. Investors have been buying small and mid-caps. We see that in the distribution of buying:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
So, money is flowing into small- and mid-caps, but which sectors are seeing inflows?
The short answer is – most of them.
Looking at sector ranks there is something strange happening. The top three are Financials, Utilities, and Energy. Health Care and Real Estate are near the bottom. I prefer to see Technology and Discretionary leading bull markets. They are great barometers of a healthy consumer economy but are middle of the pack now:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When we look at charts of unusual buying/selling broken down by sector, we see something glorious! Inflows are mostly rising in each sector:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We see strong buying in Utilities, and constructive inflows in Financials, Energy, Industrials, Technology, Materials, Staples, Discretionary, Real Estate, and Health Care.
Utilities look like the clear anomaly. The sector has risen so fast and buying has become unsustainable. That doesn’t mean it can’t continue, but if there is one sector poised for reversion soon – it’s Utes.
Real Estate is an interesting value opportunity. When rates come down, demand for high-yield stocks will rise. REITs are legally required to pay out 75% to 90% of profits in the form of dividends.
Now you have a target shopping list: small and mid-caps in most sectors… sounds good!
You could just go buy stocks, but, as mentioned, it’s not that simple, unless you want to be the best. If you want solid performance, just buy IWM – the Russell 2000 tracking ETF for small caps, and buy SPY, the S&P 500 tracking ETF for broad based exposure. History and Warren Buffett say you’ll do fine. History and stats also say that money managers won’t necessarily do much better.
According to a 2023 report from S&P Dow Jones Indices, fewer than 10% of actively managed U.S. stock funds have managed to beat the index over a 20-year period ending in 2023. A 2023 Visual Capitalist study also found that 95% of large-cap actively managed funds have under-performed their benchmark over the past 20 years. But…. I think we can beat the market… in fact I know we can.
Here’s where the Mamba Mentality (and my mother’s training) matters. My research ranks thousands of stocks each day in terms of fundamental and technical strength. We then look for when the strongest stocks see unusual money inflows. That becomes a weekly list of the 20 highest ranked stocks seeing unusual inflows. This is where we have found historical out-performance.
This being an election year, I wanted to see how the top 20s from May performed vs, the S&P 500 in prior election years, starting in 1992. Here’s what I found:
Source: MAPsignals, FactSet
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Top 20 stocks outperformed the S&P 500 for every election year. Basically, if you bought the Top 20 and the S&P 500 on the same days in May, and held them through their peak returns, that’s what you’re looking at. The Top 20 from May in election years averaged nearly twice the peak reinvested return than the S&P 500. This tells us one simple truth: it matters to seek out the best… Finding the best stocks may seem hard, but they share qualities of superior fundamentals and strong money inflows.
Finding a world class athlete is easy, too… just look for the eye-popping statistics. Being a world class athlete can be more obvious to see, but like stocks, let them do the hard work, and let us just find them.
Adopting the Mamba mindset is simple and best characterized by Bryant himself, in three words:
“I’m chasing perfection.” – Kobe Bryant
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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Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.
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