Nick’s Note: Last month, the broad market fell more than 9%. To get the scoop on what’s going on, I turned to PBRG’s Wall Street insider Jason Bodner.
Regular readers know Jason spent years as a trader at New York firms such as Cantor Fitzgerald. He created a proprietary system that scans nearly 5,500 stocks every day to find the best of the best… But his system can also detect which direction the market is going in.
So I asked Jason what’s behind the recent bout of volatility, and when he expects it to end…
Nick: The market was down over 9% in October. And we’re still seeing a lot of volatility. What do you think is behind this?
Jason: The sell-off started with a sudden absence of buying, coupled with negative investor sentiment.
Some traders will wait for periods of low liquidity—when trading volume declines—then put pressure on stocks to move the market in their favor. This time, they decided to move the market lower.
With stocks moving lower, institutions are taking profits… and that’s putting more pressure on stocks. That creates more negative sentiment, which creates more selling. It’s a vicious downward cycle.
Nick: Why did traders start selling last month?
Jason: Last month was the end of an earnings blackout period. These blackouts happen every three months, before companies release their quarterly earnings reports.
A positive earnings report can send a company’s stock rising. And a negative report can send it tanking.
Company executives may have access to inside information in these reports before they publish them. So the Securities and Exchange Commission restricts publicly traded companies from trading their own shares shortly before and after earnings.
Most companies release earnings in January, April, July, and October… So you won’t see many buybacks then.
Traders can take advantage of this period of lower trading volume to push stock prices down.
The blackout period for October stock buybacks is over now. And when blackout periods end, the market pops soon after.
Nick: So you expect more buybacks now that the blackout period is over?
Jason: Goldman Sachs just reported that buyback activity is up more than 88% year-over-year. And I expect that trend to continue.
Last week, pharmaceutical giant Merck announced a $10 billion buyback. And E-Trade, Charles Schwab, and Marvell Technology each announced $1 billion buybacks.
Wells Fargo said it will buy back 350 million shares as well—worth nearly $20 billion!
There is an underlying bid for U.S. stocks as companies continue taking advantage of low taxes and low interest rates as an opportunity to buy back their own stocks.
It’s possible we’ll see $1 trillion in buybacks before this year is over.
Nick: That’s good news. When do you think this current pullback will end?
Jason: I think we’ve seen the bottom in the S&P 500 for this pullback.
As our readers know, my proprietary system sifts through nearly 5,500 stocks every day to find the best ones based on fundamentals, technicals, and unusual buying.
Now, for my Palm Beach Trader newsletter, I use this data to find individual stocks that are ready to outperform the market.
But I’ve also created indicators for overall market calls.
That’s how I was able to call the top back in January 2018… And I knew the time wasn’t quite right to get back in when we talked in February.
Last Friday, my system flashed an “oversold” rating. And what I’ve found is that when this indicator reaches oversold, selling is near its end. It has been very accurate over the years when it comes to pinpointing bottoms in the market.
Since our live data began five years ago, this oversold indicator has appeared three times.
In each instance, the market rose higher just a few weeks later. The average return of the S&P 500 was 8.4%, while the average return of the Russell 2000 was 7.3%. That’s just eight weeks after seeing an oversold indicator.
In short, the bottom is either here, or near.
Nick: I’m glad to hear that. It’s tough holding on during these drawdowns. Can you tell us why you’re still bullish, given all the scary stories out there?
Jason: Despite the “gloom and doom” you hear in the financial press, the numbers indicate otherwise.
Record cash repatriations continue. U.S. companies bought back $721 billion worth of profits through September. That’s spurring those record buybacks we just talked about.
This will be the third consecutive quarter of 10% sales growth and 24% expected earnings growth from the large-cap S&P 500.
Meanwhile, the mid-cap S&P 600 should have 34% earnings growth.
People are worried about interest rates ticking up. They’re more favorable compared to recent history, but they’re still near historic lows.
Who in their right mind would pull money out of double-digit sales and earnings growth from equities to chase a 3.1% yield on the 10-year Treasury?
Where else is there to invest? The European and Latin American stock markets are all experiencing volatility, too.
So I’m bullish on U.S. equities for likely another six years.
Nick: Where do you see bargains right now?
Jason: Believe it or not, almost all sectors are oversold by my metrics.
Technology, consumer discretionary, real estate, financials, and industrials are the most extreme.
The long-term view, though, is that the stocks getting really hurt right now still have superb fundamentals and strong sales and earnings. The fundamentally superior stocks should bounce the fastest and highest.
As we slog through this volatility, I think it’s a great time to hunt for bargains.
Nick: Thanks for your time, Jason.
Jason: You’re welcome. Try not to let the fear and gloom get to you… And stay bullish!
Nick’s Note: If you have a question or comment for Jason, send it to us right here…