October 8, 2019

Sharks are pretty much always hungry, and they love blood: that’s no secret. But the smell of blood makes them hungrier. It sends a message to the brain saying, “Eat now!” Despite being solo diners, the smell of blood can lead to a “feeding frenzy,” which can cost sharks their lives as they battle for food.

September saw a feeding frenzy for some sectors, and October started off with two big down days:

Two Big Down Days Table

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

Despite the two down days, the market rallied back, with the S&P 500 ending the week down just 0.33%. The bad news is that the rally was on lower volume and the pain was concentrated elsewhere. The Russell 2000 finished down -1.3% for the week, followed by the DJIA at -0.92%.

Upon closer inspection, we see that the weakest sector was energy, by far. That makes sense, given Oil’s brutal week. WTI Crude fell nearly 5.7% last week. The Dow Jones Transport Index was ugly, too, down 3%. Financials, Industrials, and Materials were all weak, each putting in worse than -2.2%.

The bright spots weren’t many, but there was one: Growth. Looking at the index table below, the standout was the PHLX semiconductor index. It’s still the leading index since the Christmas Eve lows last year, but it was under pressure for quite a while – until lately. It caught a big bid this past week, rallying over 2%. The NASDAQ 100, Russell Growth, and NASDAQ comp indexes were all strong last week. And looking at the sector indexes, Information Technology was a standout best performer with a +1.11% gain.

Standard and Poor's 500 Sector Indices Tables

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

In a down market week, the news always looks bad on the surface, but if we dig a layer down, we can see growth rallying. More importantly, what does the big money say?  As you know, I gauge market strength and weakness based on what I see big money investors doing. More good news/bad news: The good news is that the S&P 500 is still only 2.4% away from all-time highs; the bad news? Big money is still selling.

The heaviest selling last week continued to be in Health Care and Tech. Industrials also saw big money selling. Telecom too, but remember, this is the smallest sector, with only 24 stocks in it.

Map Signals Table

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

Let’s look at where the pain was. Once again, Software took a drubbing, with 34 sells out of 47 stocks (72% of the universe). Biotech and Pharma saw 41 sells out of Health Care’s 69 (59% of the universe).

Top and Bottom Five Industry Groups Table

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

Some Big Funds Got Mauled by Sharks Last Month

The real question is: “What’s going on?” Frankly, many of the best hedge fund managers may be asking the same thing. A Friday article in the Wall Street Journal showed that some of the best managers out there got absolutely mauled in September:

“Several technology-focused funds were among those hit hard. Tiger Global Management LLC, a hedge fund founded by billionaire Charles “Chase” Coleman, lost 7.4% last month, said people familiar with the numbers. Philippe Laffont’s Coatue Management LLC lost about 6%, Whale Rock Capital Management LLC dropped 14%, and Glen Kacher’s Light Street Capital Management LLC lost around 10%, according to people familiar…”
– “Steve Cohen’s Hedge Fund, Point72, Tiger Global Hit in September,” Wall Street Journal, October 4, 2019

The article also cited popular momentum trades being hit hard – those are stocks being bought simply because they are going up. These would logically include many tech names. When reversions happen, they come swift and hard. This is what we have seen in Software for a few weeks, and Health Care more recently due to fears of a Presidential nomination for the Health-unfriendly Elizabeth Warren.

As far as how long this selling persists, usually when it hits the newspapers, it’s near the bottom. That said, I don’t think we are out of the woods yet. We saw buying on Friday, but too little to get excited about, and nothing close to capitulation. On the bright side, the worst is likely behind us and, if I’m forced to call it, we are likely in the bottom of the 7th inning for high-beta selling. (A stock that swings more than the market over time has a beta above 1.0.) In recent trading, the biggest winners were getting hit hard.

What I will say is this: Personally, I moved a slug of money into one of my longer-term accounts to start buying some beat-up prior high-flyers. I look for stocks with superior fundamentals and weak technicals to serve as buy candidates. Companies with monstrous sales and earnings growth, rich profit margins, and low debt didn’t all have simultaneous sudden changes of circumstance – except this: They got sold hard.

Many funds got caught in the wrong sectors in September and were forced to sell their big winners to pay for losses on wrong-way short bets. When big money needs out quick, prices gap down. When that happens in today’s market, the algo-traders smell blood in the water and then the real moves begin.

The most important fact is that one person’s misfortune is another’s opportunity. Buying illogically priced assets under distress is a long-term winning strategy. Just ask Warren Buffet. Or Winston Churchill, who said: “The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.”

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

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