November 20, 2018

Are cats solid or liquid? The question seems easy enough to answer, but it turns out it’s more in the eye of the beholder. A recent study was conducted to tackle that seemingly ridiculous question because of cats’ tendencies to take the form of whatever container they are in. I now present to you…. liquid cats!

This question – liquid or solid cats – once won the “Ig Nobel Prize” for trivial achievements in science.

Why am I bringing you cat pictures? Because looking at liquid cats is more pleasant than looking at this market! So if I show cat photos, does that make this a bad market week? That’s in the eye of the beholder.

Another week, another nail-biter…

This past week saw more volatility, but, despite what it looks like, some constructive action for U.S. equities. When we saw selling, the volume was not present to make it a significant concern. According to my research, when the intense selling of late October came about, I would often notice well over 1,500 stocks tripping my abnormal volume and volatility ranges. That meant that nearly 100% of my institutionally tradable universe was getting sold hard.

Since the bottom for the S&P 500 on October 29th, I have been seeing an average of around 600 stocks traded in unusual volume and volatility each day – or less than half of the heavy selling we saw in October. What’s also encouraging is that up days saw 600 to 800 stocks triggering volume and volatility trips. For me to get buy or sell signals, the stock first has to trade on unusual volume and volatility, but it also has to trade outside interim highs and lows of roughly a 12-week period. So, I see a daily average of roughly 700 stocks making it through the first phase of signal generation, and 100 actual buy or sell signals each day. I’ve seen a daily average 4 out of 10 stocks being bought in an unusual way over the past 13 days since the bottom. This is significantly above the MAP-IT oversold ratio threshold of 25% and is a big uptick compared to the week of October 22nd when we saw daily unusual buying of only 5%.

Speaking of the MAP-IT ratio, it has been slowly but steadily climbing out of the depths of oversold territory. Remember it’s a 25-day Moving Average of unusual institutional buying and selling of stocks. It currently sits at 27.9%. This is interesting because the S&P 500 is now more than 3% above its closing 10/29/18 low of 2641.25. The same goes for the Russell 2000. It’s +3% from the 10/24 low of 1468.70.

My data says I should expect this trend to continue unless we see more heavy volume selling breaking new lows. We haven’t seen that as much as normal aftershocks and higher lows on lower volume. This indicates the selling – while still clearly present – is exhausting itself and the market is trying to firm up.

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

With all that positivity, though, the 1-week performance for the S&P 500 sectors was ugly across the board save for Real Estate and Materials. Tech and tech-related consumers continue to be painful.

Here’s the rundown, according to FactSet:

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

“So, Jason, Tell Me Again – Why Are You So Bullish?”

So, this is the perfect segue into the most frequently-asked questions I have been asked recently:

“Jason- are you still bullish? And if so, how can you be?”

I can’t tell you how many times I’ve been asked that recently, especially on days like last Monday, when the market is all red. This volatility has been gut-wrenching for well over a month now and all along I have been telling you why I am bullish on U.S. stocks. How can that be when we seem to be going lower?

According to FactSet:

  • U.S. companies continue to beat sales and earnings expectations for now a record third quarter in a row. With a majority of the S&P 500 companies reporting Q3 earnings, 78% reported a positive EPS surprise and 61% have reported a positive sales surprise.

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

  • For Q3 2018, the blended earnings growth rate for the S&P 500 is 25.2% which if it stays like that will be highest earnings growth since Q3 2010.
  • The blended (year-over-year) revenue growth rate for Q3 2018 is 9.4% – the second best since 2011.
  • All 11 sectors have higher growth rates today (compared to September 30) due to positive EPS surprises and upward revisions to EPS estimates.
  • The forward 12-month P/E ratio for the S&P 500 is 16.0, which is below the 5-year average (16.4) but above the 10-year average (14.5). Lower P/E’s mean cheaper valuations.
  • Only 33% of companies reporting cited “tariffs” on their calls vs. to 38% for Q2, meaning it’s less of a concern than previously thought.
  • The Consumer Discretionary (+15.6%) is reporting the largest upside aggregate difference between actual earnings and estimated earnings, meaning consumers are out there spending!
  • Corporate taxes are at record lows – companies are keeping more money!
  • Cash repatriation continues from overseas.
  • Corporate buy-backs continue on a mind-numbing pace, on a path to $1 trillion this year.
  • U.S. Indexes are still up respectably from corrective lows this year and 1-year lows.

So, I say in response, “Why is everyone so glum?” There are so many reasons to be cheerful about U.S. stocks. This list is almost unmatched at any point in history! In addition, I believe a trade deal with China will come soon and remove the last barriers of uncertainty to lift the market higher. But if all that’s not enough, I still always fall back on my “ace-in-the-hole.” Just do yourself a favor and look at a 100-year chart of U.S. stocks. It should tell you all you need to know. The game is rigged to the upside:

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

As far as the market goes, the rapper Talib Kweli understood the importance of being fluid and flexible when he said: “Things are fluid in this world, and if you don’t remain fluid, you get lost in the sauce.”

So cheer up and enjoy some turkey!

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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