by Jason Bodner
August 20, 2024
In May, a flight from London to Singapore was smooth until suddenly the plane underwent “un-commanded changes in altitude and airspeed,” according to the Transport Safety Investigation Bureau of Singapore. It dropped 40 feet per second (178 feet in 4.6 seconds), enough to cause half of the 229 passengers to need medical treatment. A fall like that can throw people (without seat belts attached) to the ceiling, only to have them crash down to their seats, or on top of other people – or whatever they hit.
I was once on such a flight, under dire conditions in a sudden drop, and the masks came down with a pop. We dropped quickly and then stabilized. We then saw a flight attendant dragging another unconscious flight attendant to a jump seat to be strapped into a seat belt. Thankfully, we were fine, but I experienced how things can change suddenly. I also realized that I don’t ever want to wear an oxygen mask again!
The moral of the story is: Wear your car or airline seat-belt all the time. You never know when you’ll hit an air pocket. Or maybe you do. When it comes to stocks, August and September are typically the bumpiest months of the year, followed by the smoothest – and best – three months of the year:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This month certainly didn’t deviate from the norm… but if you woke up today after going to sleep on July 31st, you wouldn’t really think anything happened – the S&P 500 is up 0.58% in August through last Friday. Nvidia (NVDA))is up 6.5% in August and is back above $3 trillion in market cap and is trading just mildly off its all-time high made in June. It nearly eclipsed that high in mid-July only to plummet like that Singapore Airlines flight. It shed over $880 billion in market value in just about three weeks. To put that drop in perspective, there are only nine stocks that have a market value over the $880 billion in value drop from NVDA. In other words: 99.8% of the over 5,000 stocks I look at daily have values less than the value lost by NVDA in a few short weeks.
What I’m saying is that this August market air pocket, although predicted and volatile, caused a lot of rattled nerves, but it didn’t deliver a loss to most portfolios – at least for those who held on to their stocks.
The first thing we should notice is that this correction was rotational in nature. I’ll help you visualize that rotation in a moment, but this is a case of seeing “nothing out of the ordinary” when looking at the BMI.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This shows us an important distinction: The Big Money Index is an excellent indicator for trends of money flows, but it’s not great for alerting us about sudden air pockets. It tells us what the overall trend of unusual institutional money flows will mean for how a market trends over time. To anticipate air pockets, we need to evaluate unusual buying and selling day by day. For that, we turn to another type of chart:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The dramatic swing between buying and selling tells the story much better. Last week’s level of selling is the highest since September 23rd, 2022. The market however rallied more than 50% since then:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Last week’s recovery was so swift – almost like early August never happened. We really see it when we map buys and sells vs. the indexes. On the left you will see how steep the fall was for NASDAQ stocks (QQQ), while on the right you see the manic-depressive action of the Russell 2000 (IWM):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
First, we see the SPY recovery is better on an absolute basis. QQQ’s fall was steeper, and the bounce was steeper. IWM may look schizophrenic, but it underpins the conflicting opinions about the near future.
As the election polls between Trump and Harris narrow, large cap tech is poised to continue to benefit under a Harris (extension of Biden) administration, which historically favored mega-cap technology over small-caps. But the sharp bounce for IWM shows how small caps will benefit regardless of who wins… because when rates fall, which they surely will, we all win.
In another view, look at the distribution of unusual buying and selling separated by one week:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Immense selling took place in small-cap and mid-cap stocks, only to be scooped up a week later. This tells us that the selling was a classic head-fake. Low-liquidity August provided perfect conditions for algorithm-traders to push stocks down unbelievably, only to buy them back and book enough profits for new yachts.
In yet another view of why this capitulation selling is constructive, long-term, look at the explosive ETF selling. We haven’t seen ETF selling like this since October of 2023. Looking back over the last three years, you can see how massive ETF selling tends to highlight troughs:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Extending this analysis, we looked back at similar days of ETF selling in history. August 5th saw 142 ETFs sold heavily. There were 21 prior times when selling reached that level.
Here are the forward returns of the S&P 500:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
All of this volatility is on the surface. Looking beneath, we see heavy rotation. The Sector Strength and Weakness charts (below) show the violent moves within the sectors. The left-most chart is July 1st, the middle is August 7th, and the right is August 15th. Technology and Energy fell from #1 and #2 in July to #6 and #7 on August 7th. Then Technology bounced back to #3 while Energy kept falling. Meanwhile Real Estate and Utilities rose from #8 and #9 to #1 and #3 on August 7th. Then Real Estate fell.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is what a major head-fake looks like. The big picture is that rates are falling, which will stimulate the economy, and stocks will benefit from that. I am looking forward to a bull run from the election onward. barring any unexpected geopolitical eruptions. So, let’s focus on owning fundamentally superior, institutionally supported stocks. Then sit back and enjoy the ride… but remember, wear your seat-belt!
Remember what Ben Franklin said: “An ounce of prevention is worth a pound of cure.”
Navellier & Associates owns Nvidia Corp (NVDA), in managed accounts. Jason Bodner owns Nvidia Corp (NVDA), via a managed account, and in a personal account.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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Zombie Price Controls Revived (by Economic Dummkopfs)
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Sector Spotlight by Jason Bodner
To Prepare for “Air Pockets” – Always Wear Your Seat Belt
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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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