October 29, 2019

The market is a “fast money” quick in-and-out game – or at least that’s what CNBC wants you to think.

The boring truth is, you make big money in the long game. Long decades of growth are unsexy, but they work tremendously well. Consider this: In 1951, Walt Disney hired a maid named Thelma Howard and gave her shares of Disney stock each Christmas. Those shares often split. When she died in 1994, she had 192,000 shares worth $9 million. She left the majority to her foundation supporting disadvantaged kids.

Sure, the near-term moves grab everyone’s attention, but after 30 years they mostly look like trivial noise.

We’ll delve into them anyway…The broad indexes had a solid week last week. Interestingly enough, the strength is in Growth. The NASDAQ and Russell 2000 outpaced the S&P 500 and the weaker DJIA.

Sector-wise, we are seeing strength in Energy, which is likely due to oil’s rally and short covering. Crude Oil had a +5% week. As for the last nine months, the energy sector is clearly the weakest by far since the bottom was put in December 24, 2018. Other bright spots have been in Health Care and Industrials.

Industrials and Financials were also strong, but the real story is Tech, whose +2.5% showing last week hides the long-term story: Software down, Semiconductors up. Last week saw a swath of strong earnings across the semiconductor space. Semis are seeing major buying activity. The report by Lam Research Corp. (LRCX) was a showstopper. Their guidance is suggesting the upcycle is near for semis. Same for Intel (INTC). Wall Street has been behind the ball on this group – and it shows with all of the upgrades.

Navellier & Associates does not own LRCX in managed accounts but does own INTC.   Jason Bodner does not own INTC but does own LRCX in personal accounts.

Standard and Poor's 500 Sector Indices Changes Tables

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

Likewise, Wall Street was focused on Software’s woes. This helped fuel a +3.7% rally last week in the PHLX Semiconductor index (SOX). This was somewhat mirrored in our “big money” buy/sell signals.

The big buying (vs. selling) last week was in Utilities, Real Estate, Industrials, Consumer Discretionary, Financials, and Materials. So far there has been no notable selling minus tech. Infotech is the spot where the most selling has been. Where? You guessed it: Software. In fact, 31 of 40 sell signals were in software stocks. The software group continues to be weakest of late as money rotates out of software into semis.

Map Signals Buying versus Selling Table

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

Our Indicators are Signaling Another Up Move Coming Soon

As for what’s coming next for the market, we are bullish for good reasons. Not only is money pouring into previously unloved sectors, but sales and earnings are off to a great start: 80% of the S&P 500 companies that have reported beat earnings estimates and 64% beat revenues. That’s market “juice.”

Our Big Money Index is ready to lift again. The two-week average is 69%, vs. the five-week average of 51% (as of Friday morning). This tells us that buying is gaining momentum and prior weeks of weakness will start to roll off. This is bullish. Look at how the Russell is coiled up along with the BMI:

Russell 2000 Chart

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

Can this tight coil also mean lower prices ahead? Not likely. Our ratio of buys to sells has been shifting. That alone will shift the BMI higher which usually means higher prices.

Next, look at the chart of the Russell 2000 charted against the daily net buys and sells for the past year.

Russell 2000 versus Net Buys/Sells Chart

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

The way to understand this chart is that if there were 100 buys and 50 sells, the net for the day is +50 – a positive number which appears green. (Negative numbers appear red.) Notice how when the red piles up it precedes lower prices. When the green piles up, it precedes higher prices. As mentioned above, the two-week average is higher than the five-week average – and it’s still rising. That means the buyers dominate.

Earnings season is strong, and that is largely working in our favor. Buyers are back and are taking control. Interest rates are low, and equities continue to be a better place to put your money than bonds or cash. Before and after-tax returns, the S&P 500 dividend yield is better than the return in 10-year Treasuries.

Stock Dividends versus Bonds Table

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

The news media headlines may provide you with entertainment, but they are mostly a long-term nothing-burger for your portfolio. Impeachment, Brexit, Hong Kong – the whole lot. The market doesn’t care, and its looking upward. To me, it’s looking like we’ll see higher market prices ahead.

Steve Jobs Quote Image

The short game may be fun, and it gets a lot of attention, but time and time again, success is proven to take a long time. Steve Jobs said, “If you really look closely, most overnight successes took a long time.”

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