by Jason Bodner
August 27, 2024
“3,2,1… Lift-off!”
When I was a kid, I loved the hoopla around rocket launches. Imagine hurtling upward at up to 25,000 miles per hour – seven miles per second – the speed required for escape velocity.
The energy pent up in rocket fuel makes this happen, but nothing begins until we hear that countdown.
Investors have been waiting for forever to hear some sort of countdown leading to a “lift-off” for stocks.
Well, we just heard it… Fed Chair Powell just said: “the time has come for policy to adjust.”
Those are the sexiest words any stock investors could hear… the same as “lift-off” for rocket fans.
Stocks, especially small cap stocks, are set to explode higher. As I write this, just after Powell’s proclamation, markets are already zooming. This list shows small cap stocks rising the most:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
If you think you’ve missed your opportunity, think again.
Stocks should rocket higher in the coming months, and even years. Let me show you why …
First, let’s recap the head fake in the first week of August. Recession fears were in the air, and low-liquidity markets can easily swoon in August. The Japanese carry trade unwound wickedly fast. Selling reached fever-pitch levels without warning. The result was an 8% drop in the S&P 500. And then, before the market had a chance to react, it vanished. The S&P rebounded 8.6%, as if nothing ever happened.
The Big Money Index (BMI) couldn’t even digest the violent selling, as it is calculated on a 25-day moving average basis. Notice that, as the market sank, the BMI barely flinched:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Also notice how selling immediately dissipated and gave way to unusually large buying (green shoots):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Selling hit some sectors harder than others. We saw Technology, Industrials, Discretionary, Materials, and Energy hit hard. But each of those sectors also bounced equally hard for a lightning-fast recovery:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Sector strength and weakness remains in an unusual place, historically speaking. Bull markets of recent years are often led by tech and discretionary. Tech has been slowly climbing the ranks, but Utilities and Financials are sector leaders now. One school of thought is that banks will thrive in a falling rate environment as they facilitate more lending and handle more transactions in a prospering economy, and utilities offer high yields in a falling yield environment. This also explains Real Estate’s recent resiliency:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Before we get into why Powell’s short statement could unleash a torrent of money into stocks, let’s quickly check on where we are now. Below are some charts that show the state of the market. The chart on the left, in green, shows days in which there are more buys than sells, when buying is greater than 50% of each day’s signals. That’s been most of the time since 2020. The red chart on the right shows days on which buying is less than 50%. That’s when sellers are in control. Clearly, that happens less of the time. (COVID was particularly heavy in early 2020, and the selling in 2022 was particularly heavy too).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Below, we see extreme selling, when buying was below 25%. They often highlight troughs and don’t last particularly long. The latest instances of that happening was in early August, 2024:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That natural state of the market is to see more buying than selling. And much of the recent few years’ volatility stems from uncertainty over interest rates.
Perhaps it would have been better if we had slept or vacationed through the first two weeks of August. Because it’s almost as if nothing happened. Only now, we have those eight wonderful words uttered by Jerome Powell, perhaps the most influential person on earth now. Powell said it: rates are about to fall.
When rates have fallen in the past, the rate-cutting cycle has often overlapped with a recession. That is – looser monetary policy is instituted to stimulate the economy. But that is not always the case… like right now. There is no recession. The latest recessionary fears from two weeks ago vanished into the ether. And most S&P 500 CEOs are not even talking about a recession anymore. In fact, Bank of America has removed recession from the base cases of their research models, according to the bank’s CEO.
Here are rate cuts charted to the Russell 2000 index, with rate cuts often correlated with a small-cap rally.
Source: BLS.gov, St. Louis Fed
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I found 1995 particularly interesting, because rates fell when there was no recession. The forward returns for the Russell 2000 were superb, especially looking 12 and 24 months out:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, here’s what makes this time different: The record stockpile of cash sitting in money market accounts is huge, and still rising. According to “FRED,” the St Louis Fed website, there is an astonishing $6.44 trillion sitting in money markets – the highest on record… ever, by a long shot:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
And holding money in cash makes sense to a lot of investors with high short-term rates. Fidelity’s Government Money Market Fund SPAXX has a yield of 4.98%. With the Fed Funds Effective Rate of 5.33%, you can park your money in money market funds and earn 5%. It’s a no-brainer, but no longer.
With September 18th bringing the first of three possible rate cuts for 2024, and more on the horizon for 2025, stocks are going to offer more enticing returns than plummeting yields in money market accounts.
And with small caps historically rising with falling rates, there will be oodles of opportunity to exploit. The key, of course, is knowing which stocks to buy. That happens to be our specialty, but I would suggest starting with a few simple strict criteria to help you narrow the playing field. I find stocks by looking for:
- Growing 1- & 3-year sales and earnings
- Expanding profit margins
- Low debt/equity ratios
- Strong institutional support
I just performed a screen filtering 5,535 stocks for those criteria and was left with 215, weeding out over 96% of stocks in the process. It pays to be choosy.
Rates cuts are finally here. The cash bubble will finally pop, and stocks should lift off in the process.
Life’s too short to always worry about bad times that will likely not come.
In the words of Jack Nicholson: “My motto is: More good times.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Fed Finally Joins the “Rate Cut” Party
Income Mail by Bryan Perry
What the Massive Job Revisions Reveal
Growth Mail by Gary Alexander
Deciphering Our Deceptive Jobs Data over Labor Day Weekend
Global Mail by Ivan Martchev
The “Nvidia Danger” is They Sell the Good News
Sector Spotlight by Jason Bodner
Is It Market Blast-off Time Yet?
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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