November 13, 2018

As the California forest fires raged out of control, my teenage son said, “Yeah! I heard like four celebrities had to be evacuated from their homes!”

“Noah,” I quickly responded, “thousands of regular people also had to evacuate!”

In a similar scenario, a “fire” recently ripped through the stock market, yet the names catching all the attention were celebrity stocks represented by the initials FAANG, but the destruction affected ALL stocks. Yet, just like after a forest fire, rebirth follows devastation. For instance, there is a species of beetle that thrives on fires. The Melanophila uses infrared-heat-sensing to find trees to lay eggs in. The burned trees lack defense mechanisms like sap, so the beetle can burrow freely and flourish.

The big story last week was the healthy snapback rally. The metrics I follow called the action perfectly, giving us a possible roadmap for what to expect next. First, on October 10, a report came out warning of lower prices ahead for stocks, based on unusual institutional trading activity. That report said to expect a decline of about -5.29% for 13 days until the local market trough. Precisely 13 days later, the S&P 500 bottomed out, down -5.18%. That level of accuracy is too much to expect most times, but past experience also said that the returns for S&P 500 and Russell 2000 Indexes were positive in all cases 2-8 weeks after the oversold indicator flashed on October 26th. The bounce was exactly what this report expected. That MAP-IT ratio just emerged from oversold, which means I expect a steady climb in the coming weeks.

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

Now that I have “called the bottom,” why did the market tank on Friday? There was the usual flurry of headlines and whispers that got investors’ attention. Here’s a sampling of those headlines.

  • Gold down 1.3% and WTI down 1.1%, on pace for its record tenth straight decline.
  • Earnings growth rates remain elevated, but margin pressure seen as a “risk to 2019 consensus.”
  • Fiscal stimulus continues to drive U.S. economic performance, but will it start to fade next year?
  • China getting more aggressive with policy fine tuning, but not enough to counter slowdown.
  • Fed tightening gradual, but broader QE to QT shift driving liquidity worries.
  • October PPI came in hotter than expected.
  • Italy and Brussels continue to bicker over budget.
  • Some higher-profile earnings disappointments in U.S. and Europe also weighing on risk sentiment.
  • WSJ reported Trump involved in hush payments as candidate.
  • Trump also reportedly wants Commerce Secretary Wilbur Ross out by year-end.

All these are possible concerns, but the media always needs a reason. After all, readers look for reasons, so you better have a reason if you’re a news reader!  But I think these are just aftershocks from the recent correction.

Some New Sector Leaders Begin to Emerge

What I am seeing is an expected sector rotation. Crowded tech trades, such as FAANG stocks, still suffer. On Friday, semiconductors and Chinese stocks were getting wrecked. While we saw sloppy action on Friday, last week was very positive for U.S. stocks. Ten of 11 sectors were up for the week:

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

Health Care led the market out of the depths last week, rising 4%. Notable potential new leaders being bought in Health Care were RGEN, GMED, INVA, BEAT, HMSY, VNDA, ZTS, and HCA.

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

After the top three sectors on this table, what stands out is Retail. I see unusual big institutional buying in stocks like ULTA, CROX, DECK, ROST, TJX, WMT, SBUX, and DG, just to name a few.

(Navellier & Associates holds a position in BEAT, ZTS, GMED, ROST and AMZN in managed accounts and a sub-advised mutual fund but does not own the other stocks mentioned above.  Jason Bodner owns SBUX in his personal account.)

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

Retail and Consumers are coming alive. Remember how a year or so ago Amazon was going to put all other retailers out of business? The space was a bloodbath, but interestingly now it seems reversed. That proved to be a great opportunity for investing in prior leadership, getting punished at the time. I suspect the semis and FAANG stocks are a current buying opportunity and will rebound in months to come. These companies have great sales and earnings in phenomenal businesses – they are not going away.

The volatility we are seeing is “ripples” from the splash. This usually happens for a few weeks as the market finds its footing. Part of the volatility comes from a drop-off in liquidity. After a corrective price action, sometimes it’s a “V-shaped” recovery with liquidity rushing right in. Other times, like now, it takes a while for confidence to flow back into stocks.

Sentiment out there is still very bearish. That’s yet another reason why I am bullish. I recite these same reasons here most weeks: The sales and earnings beats, low taxes, high cash-repatriation, and huge stock buy-backs. It’s still a great setup for stocks. Mid-term elections are out of the way. The China trade will resolve itself at some point, and stocks will find some ballast and most likely move north from here.

Also, when people like Warren Buffett get bullish, that’s a great sign! He’s buying back a slug of Berkshire Hathaway stock. Meanwhile, when everyone is bearish, and many are nursing wounds from crowded trades and wrong-way positioning, stocks continue to beat earnings estimates. I think it’s a great time to grab quality names on sale. Emotion will subside, liquidity will return, and stocks will once again be rewarded for their stellar reports.

I don’t know exactly when it will happen, but I have a clue: The 2-8 week returns for the S&P 500 and Russell 2000 Indexes are positive in all cases after that MAP-IT Ratio goes oversold, and that ratio just emerged from oversold, so I would expect a steady climb in the coming few weeks, i.e., by year-end.

I just came across an anonymous quote that sums this all up quite nicely:

“Things end because something else is ready to begin.”

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*


Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives