December 18, 2018

Joke #1: “The stock market dropping feels like when my girlfriend gets angry. I know there’s a reason but I’m still completely clueless. I’ve heard if I spend money things will get better.”

Joke #2:

All jokes aside, this bi-polar market is starting to wear on investors’ nerves. The graphic above is not far off, or should I say not that far off. The reality is that most market traders now look more like this:

Last Monday, the S&P 500 hit intraday lows of 2583.23 around 11:15 am. The market then proceeded to rally 3.66% to its Wednesday peak of 2684.78. And as Friday’s close, it was a tick under 2600 at 2599.95. If you’re looking for something that is up, the VIX is at 22, as high as a giraffe’s neck, and climbing.

Friday morning the market started off cranky over “global growth slowdown concerns,” with headlines eventually giving way to “China slowdown concerns.”  Then Johnson & Johnson dragged down the healthcare sector on a story about their knowledge of asbestos in the baby powder. It was an old story, but nonetheless it brought down a market stalwart. This pounded XLV (the healthcare select sector ETF), down 3.28%. The broader market was actually met with buying for the first half hour on Friday, then more selling began, which is not atypical for a Friday during a volatile period in the markets.

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

I have been saying that the data I look at has indicated a firming market. Before last week, we observed higher highs and higher lows. The lows were on lower volume. This was bullish. We observed a rising ratio, indicating more buying than selling and the outsized selling was slowing. This was also bullish. We have observed popular stocks being punished, but then showing resiliency. This too was bullish.

(Navellier & Associates Inc. does not own JNJ, in managed accounts or mutual fund.  Jason Bodner does not personally own JNJ.)

That is what I saw for the previous week and a half or so, until this past week. Last week, we saw more sell signals than buy signals. Keep in mind, however, that the number of signals is still within a normal range, but it’s just that selling outweighed buying. This is different from late October, when we saw a massive number of signals coupled with lower prices. Right now, we are getting more sells than buys but on overall lower volume.

This leads us to another troublesome spot: the MAP-IT ratio is declining again. The last time our ratio hit oversold, it worked like clockwork. A big bounce was predicted, and the market did exactly that. But now as the ratio declines along with market prices, we head closer to being oversold. Should selling like this continue for a few weeks, we expect the ratio to drop again into oversold territory, which would likely preface another significant bounce.

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

Peak Earnings and sales growth momentum is the scare-du-jour. China trade talks, despite showing positive signs, still have market participants skittish and anxious. The Fed meeting is now imminent and by many accounts, they have less and less impetus to raise rates as markets are in turmoil, and yields are squished as investors flee for safety. The 10-year bond yields just 2.85%, while the S&P 500 dividend yield is 2.01%. As those two numbers creep closer together, the case becomes more compelling to own dividend growth equities. Again, dividend income is taxed at an effective long-term-capital gains rate of 23.8%, while bond interest is taxed at an effective ordinary income maximum rate of 40.8%.

The real tax equilibrium would have the 10-year yielding 2.7% with the S&P 500 dividend yield of 2.1%. We are very far away from that, but a narrowing between the S&P dividend yield and the 10-year is bullish for stocks. Dividend yields expand naturally with lower equity prices. But bond yields still don’t offer enticing features other than, as Bob Dylan put it: “shelter from the storm.” There is no capital appreciation feature like that of stocks. And as equities become more depressed, they become more desirable – unless you subscribe to the whole “world is ending” argument…and if you do, you may want to load up on guns and gold and cans of tuna for your bunker, rather than either bonds or stocks.

Believe it or Not, The Tech Sector is Still Positive Year-to-Date

I’ve never really bought into that “end of world” story, even during the height of fear in 2009. The market has a way of righting itself and trending up over a long period. I am still bullish on U.S. equities. My narrative for this week is that I still believe the market will rebound at some point. The data is supportive of this position. It began, and then basically it failed to hold on. Selling has resumed, and buyers were worse than scarce this week. I’d like to see the MAP-IT ratio resume an upward trend, indicating strong buying under the surface. It will happen, it just didn’t happen this last week.

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

Energy and Financial sectors remain grossly oversold, but they are not the only sore spots. For all the talk of a tech wreck and high-flying growth stocks being the source of pain, performance indicates otherwise:

The worst 3-month performances (from the chart above) are:

  • Energy is -16.48%
  • Industrials is -15.23%
  • Financials is -14.19%
  • Materials is -13.93%
  • Consumer Discretionary is -13.03%
  • Infotech is -13.92%

That’s abysmal, yes, but year-to-date, consider:

  • Infotech is +2.4%
  • Industrials: -12%
  • Communications: -12.9%
  • Financials: -13.6%
  • Energy: -14.7%
  • Materials: -15.5%

As markets get more oversold, sectors go deeply oversold, bond yields contract and dividend yields expand. All this is bullish for stocks. Add some solid fundamentals and the bull case is very much alive, in my view. Talking to bears, I find lots of postulation and theory, but when I look at the data, it tells me those who buy stocks into fear get rewarded long-term. If I am wrong, at least I’m being wrong in an informed way. But if I am right, I wouldn’t want to be short this market.

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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