October 1, 2019

The ARPANET was an early network designed to exchange information and ideas between universities. Not only did this become the technical foundation of the Internet, but it gave students access to share ideas with the brightest minds across the nation. What would students do with this kind of power? If you were a Stanford student then, you bought marijuana. In 1971 a Stanford student used ARPANET to buy pot from an MIT student. So technically, the very first e-commerce transaction was a drug deal.

Naturally that evolved into our now-normal e-commerce. In 2018, consumers spent $517 billion online, accounting for nearly 15% of all retail sales. And we show no signs of slowing. We are moving ever-forward into automation, e-communication, and more digital life, all powered by software. So logically software should be attracting a lot of capital, right?

Well, wrong. At least according to recent stock market action. By now, you know I follow the big money, which was buying software stocks like crazy much of the last year – until a few weeks ago. When my research firm, MAPsignals, sees a stock signal, it means that the big money is likely moving in or out of certain stocks. That kind of unusual activity usually happens on roughly 2% of stocks each day.

So, what I saw last week was noteworthy. Friday was the biggest selling day in Tech we have seen in six weeks. It caused Tech to be unseated as the top sector, slipping to third behind Utilities and Industrials.

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

More importantly, 31 of 38 (82%) of the sector sell signals were in Software. But I believe there are great buys in Software if you know where to look. Scanning 5,500 stocks, I found 267 companies with the word “software” in the Sub-industry description. The average 1-year sales growth is 34% and the 3-year sales growth is 77%. The average 1-year earnings growth is 36%. My research method focuses on stocks with the best fundamentals attracting big money. Some bigtime performers are looking a lot like babies getting thrown out with the bathwater. I suspect they will soon look like deals that could have been had.

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

Political Uncertainty Breeds Volatility

In the chart above, we see big buying in Utilities. This is a defensive action as investors scramble for safety and yield with recent impeachment inquiry news. Interestingly, it looks like there was a rotation out of Health Care, as the sector saw its biggest day of selling since early August. We saw 39% of the Health Care universe log sell signals, and 65% of those sells were Biotech companies.

Managed Health Care saw selling, perhaps on fear that Elizabeth Warren gets the Democratic nomination. She has her eyes set on Health Care. I recall a similar scare four years back, when Hillary Clinton’s campaign had negative comments on Health Care. Stocks got punished but they climbed back over time. And, as is usually the case, the great stocks bounced back, high and fast, while the duds thudded.

Uncertainty breeds volatility. We should look at the VIX as a barometer of uncertainty. With less predictable outcomes, price action starts to go haywire. Volatility is certainly picking up: the VIX is climbing from its September lows. But clearly it can go much higher, as the August action shows.

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

Anytime we have the prospect of a rare event with unknown consequences, the market moves into “safety mode.”  The announcement of a formal impeachment inquiry will do that. Also, when we realize that 70% of all daily stock-trading volume is institutional, things become clearer. One article in Seeking Alpha says that 80% of the market is Algorithmic trading, so when headlines cause rubbernecking, the algos kick in.

That’s when markets can get stretched to extremes. Again, keep in mind, it’s likely not small investors like you and me selling stocks. Computers take hold and bend the markets to their will. This happens until the last of the profits are squeezed. Then we typically see a reversion as shorts race to cover. Is this just normal chop, or the start of turbulence? Only time will tell, but for now we keep watching the data.

The good news is that I suspect markets will continue higher. Europe is as messy as Boris Johnson’s hair. China’s growth is contracting. Latin America is as volatile as Trump’s tweets. (Argentina’s MERVAL index plunged -48% in a day, August 12). U.S. domestic stocks offer the best place to invest.

Oh, and the dividend yield on the S&P 500 beats U.S. Treasuries both before AND after tax!

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

I focus on finding the best stocks that are attracting big money. That’s how I find market outliers which tend to outperform, both up and down. Thankfully, outliers are always there. As for market volatility, the future is unknown; uncertainty is natural. As theoretical Physicist Brian Greene said: “Exploring the unknown requires tolerating uncertainty.”

About The Author

Jason Bodner

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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