November 27, 2018

“Mayday! Mayday! Mayday! We’re going down!” That’s what this market feels like.

Before we shout “May Day,” however, let’s look into what the words mean. “Mayday” doesn’t refer to the first day of May. It actually comes from the French “m’aider,” which means “help me.”

Maybe that fact won’t help your patience with this market, so let’s go right to the weekly sector report:

Thanksgiving week is supposed to be a time of good cheer, but the market clearly didn’t get the message. The sectors last week looked like they all had a bad case of dysentery. All 11 sectors fell, with Information Technology taking the biggest drop at -6.08%. The six-month performance for Infotech stands at -8.3%. Ugly as it is, it is only about half of the damage done to energy.

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

Energy dropped just over 5% for the week, which points to a bigger trend here. The 3-month change for the S&P 500 Energy Index is -14.3%, or -16.4% for six months. As abysmal as that is, energy stocks have not yet caught up with the fall of the leading physical commodity itself, crude oil.

West Texas Crude Oil has dropped an astonishing 34% in roughly 37 trading days. This brings back memories of 2014: From June of 2014 to January of 2015, WTI Crude plummeted 50% and eventually reached its ultimate bottom in February of 2016, down 73% from the June 13, 2014 close of $106.91.

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

What alarms me about the sudden skid in crude oil is that it reminds me of the autumn of 2014. The popular reasons behind crude’s drop and the associated energy stocks didn’t come to light until long after the move was under way. I see this time and time again. Price action comes first, reasons later. Investors generally think that reasons precede price action, but my experience is the opposite. Fundamentally, if you were a multi-billion-dollar money manager and had an inkling that future prices would collapse, you wouldn’t tell the whole world and then go short. You would go short, and then tell the whole world.

Well, back in late summer of 2014, the world watched crude oil, natural gas, gasoline, and heating oil just collapse. Shortly after, Oil & Gas exploration stocks fell through the floor en masse. No one wanted them, but no one knew why, that is, until prices had fallen so much that the prevalent story started working its way through the system. Leveraged exploration companies were in trouble because the price of the physical commodity had fallen below an acceptable profit margin. Companies that took on too much debt to explore for oil couldn’t meet their debt maintenance and the sector was ready to blow up. That spread to banks who underwrote the debt. They needed oil above $70 (or so) just to stay alive.

That calamity eventually worked itself out, but not without plenty of casualties in the industry. It will be interesting to see what havoc crude’s recent move down may cause. This is certainly something to watch.

The Market Remains in (or near) “Oversold” Territory

But before you get the wrong idea and think that I am turning bearish, I’d like to tell you something important about this past week’s price action. The good news is that this week saw a retest of recent index lows on lighter volume. This is usually a good indication that selling is drying up and dissipating.

The bad news is that selling outnumbered buying signals nearly 10-1 in my research. We saw the most selling in Information Technology: Over 18% of all unusual institutional selling was in Infotech. Consumer Discretionary saw 12% of all selling, while energy accounted for 10%.

While there are some parallels to the price action of crude oil in 2014, back then energy stocks accounted for 25% or more of unusual selling for an extended period of time.

The last thing to look at is the MAP-IT ratio.  It’s a 25-day moving average measuring unusual buying over selling. It dipped below 25% on October 26th – a signal which indicates that selling is unsustainable. At that time, we expected a bounce – which we saw almost immediately.  Then we expected a retest of the index lows on lighter volume.  This is where we are right now.  The key here is the value of that ratio. It currently sits at 28%. Notice the line on the bottom is not falling, like the index. The main thing this confirms to me is that the recent retest is on lower volume. The amount of sell signals we saw in October dwarfed what we are seeing now. In the first place, this ratio rarely falls below 25% and, rarer still, it emerges from oversold only to fall back into oversold territory. Either way – this market remains oversold, and any positive news on trade or interest rates should spark a nice rally, in my opinion.

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

The fact is that U.S. companies are coming off their strongest quarter in memory. The backdrop is still very strong for continued strong sales and earnings, continued low taxes, and general U.S. prosperity. We are in a seasonally strong time of year. The looming clouds are trade and interest rates. It is my belief that President Trump, despite his often-erratic behavior, does not want to send the country into a tailspin. This would jeopardize all he is taking credit for, and any hopes for continued Republican strength in 2020.

Any positive news on trade or rates should send us up like Charlie and Grandpa in Charlie and the Chocolate Factory. Remember when Willy Wonka said, “The suspense is terrible… I hope it’ll last”?

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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