by Jason Bodner

October 29, 2024

In 1975, China’s Banqiao Dam failure was catastrophic. Along with 61 other dams, Banqiao collapsed when Typhoon Nina hit China, causing the third deadliest flood in history. It killed as many as 240,000 people, affected 10.1 million, and collapsed 6.8 million homes.

This disaster could have been prevented.  Cracks were observed in the dam shortly after its construction in 1952, early in Mao’s rule, but nobody wanted to criticize the builders – or the central government.

Sometimes cracks appear in the stock market, too. Well, one just did… our trusted BMI has just fallen from overbought, just a few days after it turned overbought.

Today, I’ll look at just what this means, what to expect and, most importantly, how to play it.

Below, we see that the BMI poked its head above overbought (80), then quickly retreated back below:

Big Money Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Prior to this occurrence, the average duration of an overbought market was 22 days, based on the previous 73 times it happened – and the forward returns from the first day overbought were quite positive:

BMI Overbought Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This time, however, the BMI was above the 80% overbought threshold for only four days. This isn’t that uncommon: Historically, 20% of the overbought instances were four days or less in duration.

As a data scientist and quantitative analyst, I choose to err on the side of caution and go with the averages. That means, when the BMI falls from overbought, historically it means that a weaker market is ahead.

In fact, one of our studies shows that since 2014, each time the BMI falls from overbought we see that weaker markets follow:

Major Indicies Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Now that we’ve established that fact, should we sell stocks?

Well, I am not selling anything. If anything, I will be looking for dips as buying opportunities.

Let’s just dig below the surface of the BMI for a moment. One thing to note is that the BMI hasn’t fallen due to a seismic increase in unusually large selling. In fact, it’s the sudden sharp fall-off from unusually large buying that is tanking the number:

Big Money Stock-Buy-Sell Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If the BMI were plummeting along with a huge spike in selling, I’d be more concerned.

It’s also important to understand that a BMI falling from overbought doesn’t always mean the indexes will drop. Take for instance, in February of this year when the BMI fell from overbought.

As you can see in this chart, the BMI fell but the index kept on rallying for months:

BIG Money Index Chart 2

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Here’s the rub: Stock investors don’t always just buy the index and passively ride along with the overall market. In fact, an active stock picker, like myself, will remember that for years the market kept running higher on the power of the Magnificent-7, while the other 493 stocks in the S&P 500 struggled.

I’m not saying that will be the case this time, but it’s something to remember.

There is still time for an October surprise, and some election volatility. If we see softness in the final few days of October and the few days leading up to election, that would fit the historical playbook of the BMI weakening going into elections. In fact, this year was set to buck the election trend… that is, until October 22nd. Notice how the yellow line (BMI) falls before the election (blue vertical line) most election years:

BMI Small Chart

BMI Small Chart 1

BMI Small Chart 2

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Well, if stocks might be set to swoon soon, how come I’m not selling? First and foremost, the seasonality factor is on our side. Novembers are by far the strongest months of the year, going back to 1990:

Main Index Chart-Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Better yet, Novembers are positive 73.5% of the time since 1990:

BMI November Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Second, rates are set to continue falling throughout the rest of the year and through 2025.

There is now a bitter debate in the markets about whether that pace will be as strong or often as previously thought. We can see that in the 10-year Treasury rallied nearly 17% from September 16th:

CBOE Interest Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

We should get clarity on the near-term path for rates soon, but in the long term they are assured to fall. This is great for stocks, especially small and mid-caps.

I think a more interesting approach is to ask: How should I play any coming volatility?

The answer really starts with answering another question: How do you pick stocks in your portfolio?

If the answer is by identifying companies with solid sales and earnings growth, expanding profit margins, with manageable debt levels seeing heavy accumulation; well then, you’re on the right track.

The way to play it is by identifying opportunities.

We find opportunities by first checking on sector strengths and weakness.

The first thing we notice is individual sectors that aren’t seeing much selling:

Financials vs XLF

Industrials vs XLI

Discretionary vs XLY

Health Care vs XLV

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Usually, a market starts to break down when it is led by one or a couple of sectors. I’m just not seeing that in the data. In fact, I am seeing some sectors just naturally retreating from recent huge rises. Such is the case with Financials, Technology, Industrials, Materials, Real Estate, and Health Care.

Checking in on the rankings, we see Health Care is dead last:

Sector Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

But that might be where to find some opportunity. Ordinarily, I like to use the old axiom: the trend is your friend. Using that logic, we should look in Financials, Utilities, and Technology. But let’s imagine you could only trade Health stocks to find bargains. The seemingly endless push and pull of buyers versus sellers in the sector makes for a confusing landscape:

Health Care Buy-Sell Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

My plan would be to identify the top and bottom stocks with a ranking system. This way we can discern the leaders, and the laggards to avoid. The fact is I can find buys in this sector, too. The bottom line is that regardless of the market direction or outcome, we can identify winners and losers within any set of stocks.

The BMI is falling from overbought. Volatility may be near. Or it may not. Either way, we can choose to flee or face opportunity. Or, as Seneca put it, “Luck is where opportunity meets preparation.”  

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Have Stocks (Finally) Begun to Notice Bonds?

Sector Spotlight by Jason Bodner
Are We Seeing “Cracks” in This Bull Market?

View Full Archive
Read Past Issues Here

About The Author

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

Important Disclosures:

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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