What Money Flows Reveal Before It Hits the News | Jason Bodner

70 to 90% of all the volume of stocks traded in the stock market is done by institutions and professional firms. What are they doing that most people don't know? And is it possible to tell when institutions are buying? Today we sit down with Jason Bodnar, who is working for the institutional investors executing trades. He'll tell us how things work behind the scenes, what he's seeing right now at what institutions are doing, and where are the potential opportunities in his opinion. If they leak out that information to you or me, we have an edge. We can go, oh, well, he's gonna buy, I'm gonna buy in front, right? So he's never telling you. And I remember a very well-known investor coming on TV and they disclosed his stake. I think it was in Apple. And there was a massive trade the day before and he's smiling. And you can see the share price of Apple in a little box on the bottom of the TV screen. It's up 2.3%. It's like this individual's already up several hundred million dollars. He's like, ha, ha, ha. He didn't tell you the day before, right? He told you the day after. I'm Siamak, this is Market Insider. Jason, it's great to have you on, welcome. Thanks for having me, it's great to be here. We wanna talk to you about money flows and you're an expert in this field and you're studying, you've studied how institutions invest and you've developed tools and ways to invest with them. Can you tell us how it works and how money flows into these stocks and companies? You know, little known fact is that 80 to 90% of all daily volume on the stock exchanges are institutions. 80 to 90%. 80 to 90%, that's right. These are studies done by J.P. Morgan and Morgan Stanley independently over the years. About 80% of that volume are not even people. These are, you know, robotic hedge funds, algorithmic trading, high frequency trading, things like that. So over the years of having been on Wall Street and my job was to trade very large orders. You know, if you and I wanna buy stock, you just take out your phone, you buy your shares and you move on with your day. But if, say, Warren Buffett wants to buy stock or you're a $20 billion hedge fund and you wanna take a meaningful position, you gotta buy a lot and you wanna pay people to try and keep it quiet because if everybody knows what you're doing, they're gonna leap in front of you, right? It's a whole game. That's what I did professionally until about 2014. My whole perspective is if you're not focused on institutional flows, you're basically missing like 90% of the market. You know, CNBC and the news media will represent retail traders and individual investors and they are very much active. I'm not discounting them. But at the same time, it's like, where's the money? It's in the institution. So MoneyFlow is my firm. My research is focused all on that. How much of a heads up do you have? How much earlier can you predict? Like, when can you predict the institutions are buying? A little bit about institutional buying, at least from my perspective, what I used to do. I was paid for years on Wall Street to be a broker of large institutional block trades. What does that mean? That means if a hedge fund or a pension fund wants to buy millions of dollars worth of stock, hundreds of millions of dollars worth of stock, they usually have to employ agents to help them do it. They don't just buy it in the machine, the stock price will run away. So my whole focus was to ensure that the order flow did not make an impact, that it's as invisible as possible. So identifying- The price doesn't go up. Right. Because if you did, then people would not sell. Yeah, they get on the phone, be like, please, be 10% of volume, don't impact price, keep it quiet, blah, blah, blah. Because if they have days- When you would know the size of the order. Yes. Like how big it's coming. Maybe they parcel it out. But if they have days worth of buying to do, if you ruin it on day one, you're really fighting against yourself. Right, exactly. You asked how much in advance, what kind of warning we could get. So what MoneyFlows does is it measures all the normal volumes of all the stocks on the exchange, and it looks for abnormal violations of volume, volatility, price, and we get signals every single day. So after the close of today, tomorrow morning our models will run, and I'll have a list of stocks that sees unusual institutional inflows or outflows, or just unusual size also. So how much of a warning do we get? They're trying to keep it quiet today, I can see it tomorrow. Normally, when an institution takes a stake of material ownership, you have to file something with the SEC called a 13F or a 13D. Stakes of material ownership. If you own more than 5% of a company, or if you're managing more than $150 million, and you take a meaningful stake, you have to disclose it. It's the law. Here's the rub. They can wait weeks until they're just at the threshold for filing, and then after they pierce the threshold, I believe, law might have changed years ago, it was like you had 10 days. So you could get a notice hitting the news tape that so-and-so took a stake in a company, it could be a month, a month and a half later, whereas we're trying to find it a day after it starts happening. So we can be really early. And in terms of these positions, how much time do they spend? So when an institution starts buying, do they buy over six months? Do they buy over a week? Do they buy over a couple of months? It all depends on how much they need to buy. I've handled one very large order where I myself personally accumulated about 5% of a company's outstanding float. It was $600 million worth of stock. And the ultimate buyer was doing that through me and several other Wall Street firms. This is way back when. It took a month, it took one month and news came out that he had acquired more than 10% of the company and was trying to be as an activist within. But the news didn't come out until after the buying stopped. And during that time, the stock rose 70%. 70%. In a month. You're trying to keep it. And well, we kept acquire for the first few days, but when you outsize the market, you outsize the market. The word is out. There's a massive buyer. Everybody's buying and everybody's competing. And is there benefit of getting involved with the institutions or getting involved? Do you see a direct benefit? Well, I think you need to think of it this way. I don't know how many interviews on CNBC I would ever see of someone coming on TV and telling us they intend to take a long position in a stock or they intend to sell their position in a stock. They're always, always gonna go on TV and tell you after they've established or exited a position. Why? Because information is supremely valuable, right? If they leak out that information to you or me, we have an edge. We can go, oh, well, he's gonna buy. I'm gonna buy in front, right? So he's never telling you. And I remember a very well-known investor coming on TV and they disclosed his stake. I think it was in Apple. And there was a massive trade the day before and he's smiling. And you can see the share price of Apple in a little box on the bottom of the TV screen. It's up 2.3% and it's like this individual is already up several hundred million dollars. He's like, ha, ha, ha. He didn't tell you the day before, right? He told you the day after. So what is the benefit of following institutional flow is they are trying to keep their moves quiet until it's time to announce it to the world. So one could get on the coattails and benefit from that in theory, or at least that's my theory. What about right now? What are you seeing? Is there money flowing into certain industries or sectors? Absolutely. So there are two things going on. You remember in March of this year, we had a big market correction. Things came down very fast. And then we had this massive V-shaped recovery in April. And there was a ton of unusual money flows moving into AI stocks, moving into tech stocks. And things peaked around in June when SpaceX came out. And then all of a sudden focus moved away from AI FOMO to, oh my goodness, what's happening with Iran and energy and all that stuff. What we are seeing now in August is sort of typical volatility, things kind of chopping around. But if you look under the surface for nine weeks, institutions or there's been heavy accumulation of healthcare companies, financials, and also technology stocks. And what happened was in July, we saw a big sell-off in AI stocks. And July 29th, the news came out that the Situational Awareness Hedge Fund, which I think at its peak was managing maybe $45 billion, and they were levering their capital four to one, had basically gotten carried out of their positions due to their extension of leverage. So they were forced to sell. So all those AI stocks were selling down. The big hedge fund Citadel bought his portfolio. All those stocks went way back up in most of August. And news reports came out just last week that Citadel was exiting. We could actually see those flows on money flows. We could see the money flow going in, you could see it going out. And you could see the very day where there was a huge outflow when Leopold Aschenbrenner had to liquidate his book to Citadel. So what we're seeing now, the bounce in AI stocks, healthcare stocks, and also financials. Tell us about those sectors. Do you think there's a reason behind? Healthcare is usually a place during midterm election years that investors often seek safety. There's a difference between a risk-off market where everybody's selling everything and a rotational market where people sell this to buy this. And we're in a rotational market right now. I think it's important for historical context that midterm election years, going back since the 1950s, are historically the weakest for the S&P 500. And the months of August, September, October are specifically the least strong out of the entire year. So what the good news for everyone out there is that November and December in a midterm election year are the strongest of a four-year presidential cycle. So what I think is playing out right now, money flowing into healthcare, it's kind of a more stable place. AI stocks saw some pressure. They're starting to come back. Typically, I would expect growth stocks to be a little bit under pressure in August, September, and October as looming uncertainty over what the election means for the future, right? If there are more Democrats, Socialists, Liberals, there tends to be more regulation, which means it's an impediment to growth. So you see growth stocks get sold. We're also seeing money moving into, they were moving into higher-yielding stocks like REITs, et cetera, because people are seeking safety when there's an unknown. When there's uncertainty over an election, Wall Street hates not knowing stuff. They don't like uncertainty, they reduce risk, and they seek safer areas. So places like healthcare, we've seen a lot of that. I would expect September to see some amped-up volatility as we get closer to the election and there's more mudslinging and political footballing. But once November 3rd happens, I think we're gonna have, history says we should expect a very nice rally. And do you see money flowing to certain themes over other ones? I'm so glad you asked that. We at MoneyFlows have just come out with what we call Frontiers. These are 11 thematic indexes, and it really helps answer the question. For decades, everything's been about sectors, tech stocks, material stocks, utilities stocks. But you know what? When I'm talking to people in the real world, nobody's asking me what the best industrial stocks are, what the best even tech stocks are. They're asking me, what are the best AI stocks? What are the best photonic stocks? What are the best space stocks? So in answer to your question, we created these thematic indexes to track the biggest themes. And it's like a veil was lifted. You could suddenly see there is a lot of money flow chasing certain themes. Photonics has been one of the biggest themes of the year. As AI chips, remember last year, everybody was worried that chips weren't, there weren't enough chips and the chips weren't fast enough. There aren't enough chips, but the chips are plenty fast. The problem isn't the speed of the chip. It's the speed of one chip talking to another chip in that connection. Old school technology, a lot of copper wire generates heat, resistance, things are slow. What's solving that problem is fiber optics and photonics. Photonics is everything in the optics stack. Lasers, fiber optic cable, connectors, regulating processes that ensure the light is high quality and that you don't have degradation. This space is solving a problem, right? We have an AI bottleneck. We have a memory bottleneck. And on top of it, I don't know if you use chat at GPT, but did you ever type in a prompt and you see the little black dot pulsing? Nothing's happening, nothing's happening. It's not that the chips aren't fast, the communication speeds are not fast enough and more and more people are using it. So addressing the memory bottleneck is huge. Addressing the chips bottleneck is huge, but photonics has been a massive theme that we've seen flows moving into, and that's why. And we're also seeing a movement into robotics, stocks, automation, and space. Those are probably the three biggest themes that I'm looking at right now. Memory fits into AI infrastructure. That's obviously a tremendous theme right now, but you have your hyperscalers, you have your chip producers, your memory producers, your AI labs, obviously, anthropics coming down the pipe, but yeah, those are some of the biggest themes we're seeing right now. Have you seen something that surprises you with the current conditions that we have? Has there been any surprises for you? I would say surprising resilience in the stock market, because I remember 2022 was a terrible time for stocks during a midterm election year. There was a ton of uncertainty. Tech stocks got hammered. I think Nvidia itself suffered a 60% drawdown that year. This year, it's kind of the opposite. We're seeing a lot of strength. Markets are near highs. They are a little choppy and skittish, and I think we get spoiled as investors when markets get lofty. We're like, oh, it's down a little bit today after a big run. The truth is this year has been volatile, right? We had that March pullback, double-digit pullback. We had that April, huge historic rally. We had a little stall in May and June, a pullback in July, largely propagated by that hedge fund blowup that we talked about, situational awareness, but stocks are resilient right now. Nvidia, just on Thursday, reported unbelievable earnings. I think revenues were up 106% year over year. The big shocker was that Nvidia expected 70% revenue growth when analysts, I think, expected 36%, nearly double. The AI boom is accelerating. I think once this overhang of the election is behind us, there's gonna be really renewed excitement in the market because of that. So what I'm noticing that's unusual about this cycle is that stocks are stronger than I think they should be, but we still have September and October to get through. When you look at these money flows, are you trying to get in with the institutional buyers or are you trying to get in the beginning? And how long is the investment? It's really important to understand that money flows are important. Understanding who's buying what is important, but it's also equally, if not more important for me to see money flows into a high quality company. So I'm a growth investor. I'm looking for companies that grow their sales, grow their earnings on one and three year basis. They're making a profit. They're estimated to grow their sales and earnings. Things are really good. And obviously big companies that fit the bill right now like that are AI companies and technology manufacturers. But if we see big institution, what we believe is big institutional inflow into a high quality stock that's already strong, what that does is that increases our probability for a strong trade. And those are the exact same lineups. You need the overlap of all three to get a high conviction trade. If I just see a bunch of money running into a stock, I was looking at a stock this morning, SKM. It's a telecom company. The fundamentals were terrible. Negative one and three year sales growth. I was just barely turning a profit like 2%. Totally leveraged in debt. Just because someone was buying it doesn't mean I want to buy it. But I'm paying attention to them seeing that inflow in. When I see inflows into the highest quality stocks, that gives me much better odds as an investor over time, which answers your question, how long of a trade is it? For money flows and people who come, they have a bunch of different goals, investing goals, trading goals, income goals. I myself is a long-term, I am a long-term investor. So we use money flows to identify Nvidia in 2017, Arista Networks in 2019, a bunch of terrific growth companies that some you've heard of, some you haven't. What I'm looking for are the thousands of percent gains. And for that, you have to hold for a long time. And some people use it for swing trade a couple of weeks. Some people use it for six months. But it's really money flows is about identifying those flows, identifying the best stocks and then saying, okay, here's a pool of great ideas. This is where I want to start, not the whole universe. We're really whittling it down. And do you bundle a bunch of companies together? Like do you look at, find 10 of them and then invest in the 10 and then some not work out in the long run? Sometimes, I mean, at this stage for myself, I'm just picking and choosing because I have a big portfolio. I don't want to end up with 150 stocks. And I'm not a big trade in and out person, but some people would literally buy our weekly release list and then just rotate and see the new publishing. What's exciting now is yes to your answer on the thematic frontiers, the robotics, the space, the AI, cybersecurity, we have medical technology, we have 11 themes. We also publish a list of the 10 or 20 best stocks within each index, theme, thematic index, which would work exactly like you were saying. Just isolate those 10 companies, own them, look for flows, et cetera. You could just own the best of the theme. It's sort of like thinking about it like this. If the S&P 500 is 500 companies, what if we could isolate the top 25 companies, 5% of the index, and say, I want to own those because most of the gains come from there. This is a really cool stat. I don't know if you ever heard of this guy. There is a professor named Dr. Hendrik Besenbinder. I don't know if he's a doctor. Hendrik Besenbinder, he was or is a professor at Arizona State University. In 2017, he asked a very simple question. Are stocks better than bonds? Do stocks outperform treasury bills over 100 years? I think universally, most people would agree stocks have outperformed bonds during that time. But what he found was he studied 26,000 listed companies since 1926, no survivorship bias. If they went out of business, they're still in the data set. If they were acquired, they're still in the data set. You know what he found? He found only 4% of all listed stocks in 100 years account for 100% of the gains of the stock market above bonds. All others collectively matched treasuries. Wow. So yes, stocks performed, outperformed bonds, but you gotta be in the right 4%. That makes it really hard. So out of the 500 in S&P 20 stocks will do that. Right. And that is what sort of money flows is all about, identifying those. And now identifying them in the theme. So we're really excited about it. Now in terms of money flowing out of these companies, you pay attention to that. And does it tell you if the institutions start selling? Yes, it does. It's really good to pay attention when institutions are pulling money or distributing shares in weak companies. And I think that's the thing. You know, we started talking about institutional inflows and outflows. Those are great signals, but they're even better when you get inflows into great stocks and outflows into weak stocks, because then typically those continue to fall. Inflows into great stocks, they continue to rise. Now, one interesting characteristic that we've noticed over the years is when you get inflows into high quality stocks with superior fundamentals, like I talked about, great sales and earnings growth profitability, for nine months, those things tend to run and do really well. And it's kind of logical because companies that beat earnings it's harder to do after three consecutive quarters. You might have a miss, you might have a guide, whatever. There's an interruption in price momentum. But for companies that have weak fundamentals, you know, shrinking sales and earnings, not profitable, a lot of debt, it's a sinking ship. Those things can go down hard and fast, usually for like a month. So if people are shorting stocks or taking a short view by being long puts, that's not like a long trade, it tends to be shorter. So we do pay attention to that and we can see it. Do you think, you're mentioning AI and technology, and do you think this boom there in the AI, would it ever translate to the other sectors? Have you seen anything with the other sectors? A lot of people are employed in these sectors, whether it's retail, whether it's manufacturing, other sectors. Yeah, I think it's inevitable. I think it's going to impact everything. Years ago, we had this premise of stealth tech. So rewind five years, there was a trucking company. You pull it up on any Yahoo Finance or Bloomberg Terminal, it says, industrials, trucking, logistics, boring, right? Under the surface, they were all about cloud scheduling and maximizing efficiency of truck routes. They were a tech company under the surface. So we called it a stealth tech company. I think now, more and more, we're going to have stealth AI companies. AI is going to proliferate through every industry. Manufacturing, obviously, just hardcore chips and compute, that's obvious. But manufacturing clothing, there's going to be AI systems in place to maximize efficiency, minimize bad lots. There's going to be, certainly in the medical industry, with patient management, record care, we've already seen indications that AI can identify cures for cancer in rare cases of conditions. They might be puff pieces on the media, but the signs are there. So yeah, I think it's inevitable that it's going to maximize efficiency. Funnily enough, though, for all the kids in college, the question is, what are they going to do? Because I got multiple kids in college. I think AI will enhance efficiency and make their jobs better and more productive, but it might make it more competitive to get a job. And I do think the antithesis is the manual labor jobs are going to benefit, because there are less people to do them for years because everyone was chasing office work. And now all of a sudden, I don't know about you, but if you want an electrician to come to your house, good luck finding one. And then you're going to pay twice as much as you used to. So there's going to be a disruption event all over the place, but I'm not so negative. I think it's going to be really positive. Do you have any thoughts on the general economy and the future, based on what you've gathered, what you're seeing in terms of the money coming into the market, the way the markets are behaving? I think there's a lot of focus on the short term and the distraction. As we talked about before, we're in a midterm election cycle. There's an election coming up. There's uncertainty about rates. Inflation is back in the conversation. Nobody cared about inflation in April when the market shot up. Now we're in August and people care about inflation. What has really changed? Not that much. We're in a news distraction cycle, but economically, the economic growth that we're just seeing on the S&P 500 as a benchmark for economic measurement is shocking. I believe the last quarter, I'm yet to get updated statistics because normally they come out today, but I haven't looked at them. But I believe something to the order of 90% of the S&P 500 has reported quarter two earnings. Of those, don't quote me on it, but in the neighborhood of 83% have beat earnings expectations. And around 74, 75, even higher, have beat revenue expectations. So companies are coming out, shattering all expectations, revising guidance higher, expecting more revenue growth. And these aren't just a couple of hyperscalers skewing the results. These are a lot of companies are coming out and beating earnings. That's an indication of a strong economy and strong economic growth. So I feel like once the election is behind us, we're gonna be back in the AI boom mode. I think we're gonna see a big rise in technology and AI stocks still. Some of these chip maker stocks like Micron, even though they went up 1000% in a year, which is unbelievable, the forward PE for this stock is trading at six times earnings, forward earnings, because they can't make enough product. Margins are gonna expand, prices are gonna expand. This is gonna trickle down to the whole economy. So economically speaking, I think we're in a great time. Typically in a Republican presidency, it's good for the stock market. But right now, it's also good for the economy. We have two more years of a Trump presidency, regardless of what happens with the midterm election. If there are a lot of Democratic seats in the House and Congress, then we're gonna get sort of a stalemate and nothing's gonna happen. You know who likes that? Wall Street. Wall Street likes it when there's no threat to the status quo. There's no changes, if there's no changes. So I think things are setting up either way for great success. Companies are beating earnings. Yeah, we have some inflation. But on the point of inflation, this is a good one. We all just sat through Jerome Powell's tenure as Fed Chair. We now have Fed Chair Warsh. They are always citing 2% is what they want. The target would be. The target. I pulled statistics since 1960, using CPI as a benchmark for inflation. The average since 1960 is 3.76%. So even where we are now is substantially lower than the 60 plus year average. So I almost feel like 2%, it's a bit of a unicorn. It's like. It's more of a target. It's become more of a target. Right. We wanna be there, but we don't really. It's like telling your kids to be home at 11 and they come home at 11.15, you know, something like that. It's more of a target. But I think, yes, there is inflation. We feel it. We feel it at the gas pump, but primarily at the gas pump because I ran Hormuz right now and the choke off of supply. Assuming there's a resolution there, assuming there's, you know, palatable results with a midterm election, companies are doing amazing. And I think the economy is strong and I think we'll continue to be that way. And AI is a huge driver of it, obviously. I think I was a little skeptical of the whole AI revolution first, but it really is. When was that when you were skeptical? 2022, 2023, when it was first coming out and everybody's, you know, making silly pictures of their family members using, it didn't really have a productivity yet. Now, Jensen Huang, just yesterday on his Nvidia call, said, and I quote, AI has now become productive. Tokens are profitable. It's making business more efficient and compute is revenue. He thinks we've reached an inflection point in AI. We've turned a corner and demand is accelerating. Supply is short. You got all these things setting up for an engine of economic growth. So I do think it's an interesting time. You guys have made some indices for the, you made indices for the themes. Is there anything else people should pay attention to your work? Yeah, so we also appeal to, you know, advisors, wealth managers, people managing clients' money. They're often looking at ETFs because it's a great way to gain equity exposure to a sector, to a theme. There are multiple different reasons, right? You could get bond exposure through equities. It's a great device to help manage client money and it's liquid. But there's a lot of information to be gleaned from that. We look at thousands of ETFs every day. We can separate the flows and then we also rank, by looking at thousands of stocks every single day and ranking them, we can rank ETFs by their constituent stocks. So we can tell you which ETFs contain a much better basket of fundamentally superior stocks, which are weaker. Just because they're liquid doesn't mean they're great. So we look at all of that, plus the flows on each ETF as well. It's really interesting stuff. Jason Bodnar with Money Flows. It was great to have you on. Thank you. Thanks for having me. It's great to be here. Yeah, thank you for coming. Tell us what you think about this conversation with Jason. We read all of your comments. I'm Siamak Khorami. This is Market Insider. We'll see you next time.