by Jason Bodner
September 4, 2024
The August run of market manipulation is over. Labor Day is here. As I write, the world is quiet…
Late August finds much of the tri-state area* on vacation. Hey, if you can’t take some time off around Labor Day, when can you? Labor Day also marks the start of the NFL season. 99.4% of the time the NFL plays the first official game on the Thursday after Labor Day, and the jobs report comes out the next day.
*The tri-state area – New York, Connecticut, and New Jersey – is home to many financial professionals. Traders, portfolio managers, and every other role related to the investment world need a break. During the week before Labor Day, it is a safe bet that most trading desks are staffed with a skeleton crew.
Empty offices mean low liquidity, potentially more volatility and possibly some trading shenanigans. I think it’s no coincidence that a popular stock saw a short-seller report come out last week, of all weeks. The volatility experienced in the aftermath was amplified due to low market participation (few buyers).
It’s hard to put much stake in trading action during the last week of August. That’s why I think it’s a good time to reflect on where we are by looking at historical analogs to give us an idea of where we are headed.
First, let’s look at where we are; then I will show you some compelling data that layers even more positives for the bullish case through the end of the year and beyond.
Looking at the Big Money Index (BMI), we see that it held stable after that nasty selloff in the first week of August. If anything, it is looking to break above recent highs made in July. Remember – that amber line is a 25-day moving average of unusual money flows. When it rises, that means money is moving into the market. So, despite the massive head-fake in the first week of August, money kept moving into stocks.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Speaking of the early August head-fake, let’s look at this tale of two markets, the first week of August, and the next three weeks. On the left, you will see the distribution of unusual buying and selling from August 1st through August 6th. There was huge, focused selling in small and mid-cap stocks. And on the right, you will see a total reversal since August 7th. Small and mid-caps have been snapped up:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When we look at the distribution of what was bought up, we see more sector rotation. Health Care saw accumulation along with some technology names. On the selling side, we see other technology names and Discretionary stocks, so there has been undulation within the sectors themselves:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The main takeaway is that I am seeing new leadership. And that leadership is in the form of small and mid-cap stocks. The pie charts above represent unusual money-flows into the sectors. When we break down the individual stocks, we saw 389 buys and 239 sells. When I looked at the highest-ranking stocks bought since August 7th, the top nine-ranked stocks have market capitalization below $15 billion.
As interest rates are nearly certain to start falling on September 18th, that will supply additional wind at the backs of smaller companies. Lower costs of financing growth will fall directly to the bottom lines of these firms. Add to that the effect that rate easing will stimulate the economy and consumerism and thus will also benefit the small and mid-cap stocks. Now we are seeing evidence that this is underway.
In July, we saw an epic rally of the Russell 2000 only to reverse during that first week of August. IWM (the Russell 2000 tracking ETF) rallied 11.6% in just six trading sessions. It then dropped 10% to the August 7th lows. The key here is that it has been slowly rallying ever since then – by another 8.3%:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
What’s really interesting here is the rate of change between heavy selling and virtually no selling.
On Monday, August 5th, there were 374 unusually large selling signals. By August 25th, selling had dropped to just eight sells. It created this visible vacuum of selling, which you can see here:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I found this curious and wanted to see similar periods in history to this, and what we could gleam from it, so I went back in my data history since 1990 to find similar times where selling had a wicked peak (a minimum of 100 sell signals) and then plummeted to just 10% or less 10 days later.
There were 48 prior instances to August 26th and 27th spanning 12 years. The key takeaway is that forward returns for SPY (the S&P 500 tracking ETF) were solidly positive over various time frames. Better yet, the returns were positive a vast majority of the time:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Here is a detailed study with each instance when selling dropped to 10% or less 10 days later:
Mapsignals.com
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As I write, it’s Labor Day and there’s not much going on. In fact, one could get pessimistic knowing we are about to enter the seasonally weakest month of the year, September. Then we approach an election fraught with anxiety between two flawed candidates. It’s enough to sow the seeds of pessimism.
There is, however, cause for excitement when we look at the mounting supporting evidence for what I believe will be a bull run. This latest vacuum of selling just adds to the thesis. Rates are set to fall, and stocks are set to zoom – especially small- and mid-cap stocks based on my research. Add to this the seasonally strongest time of year being the fourth quarter and we have a lot of upside to look forward to.
So don’t get focused on the negative minutiae. Instead, focus on the positive horizon.
“Pessimism leads to weakness, optimism to power.” – William James
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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