February 4, 2019

“Houston, we have a problem.”

– Apollo 13 Astronaut Jack Swigert, 1970

This now famous phrase was immortalized in the movie “Apollo 13.” That ill-fated mission was the seventh manned space mission and the third that was supposed to make it to the moon. But two days after its launch, an oxygen tank exploded and crippled the spacecraft. Against impossible odds, the three-man crew created a plan to safely return to earth six days after launch. The method that got them home was a classic momentum play. They performed a slingshot around the moon, that is, a gravitational assist maneuver. They used the gravity of the moon to sling them around and propel them back towards earth.

This method, while ingenious, supposedly didn’t come from NASA itself, but from a hippy MIT grad student who called to offer his idea. This claim supposedly came from the ex-deputy chief of media relations at the time. Apparently, after meeting the long-haired guy, the space agency withdrew their invitation to present him to the President and the public. “Long-haired freaky people need not apply…”

The power of momentum is immense and shouldn’t be underestimated. The same gravitational slingshot effect has actually been observed at the center of the Milky Way. A supermassive black hole containing a mass billions of times greater than our sun is literally flinging stars around like toys. UCLA astronomer and professor Andrea Ghez did a 10-year time lapse of stars doing this at the center of our galaxy.

You can see it here and it still gives me goosebumps.

In the depth of the market’s December despair, many thought we were headed way lower. The pessimism around Christmas time resembled the dismal thoughts of many observers as we saw the Apollo 13 astronauts drifting away from earth to certain doom. Yet a reverse momentum slung them back to earth.

So, is it really surprising to find that the market pendulum swung so wildly from bearish to bullish, bringing us this far back so quickly? Many news headlines said January was the best since 1987. This seems wild considering that we had just experienced a December that was called the worst since 1931.

Yet here we are, so I must ask: “Where have all the bears gone?” The headlines in December were soaked with the words “bear market.” Websites were full of stories making all sorts of comparisons to 2008 and the Great Depression of 1929-41. Fear was spreading rampantly. But where are those scary stories now?

This is just one classic example of fear grabbing hold of the market only to give way to relief and complacency. But what’s really going on? We have already gone into great detail of how we believe that ETFs were the main culprit in causing the calamitous selling of late 2018. (If you haven’t seen it, I wrote an exhaustive white paper on the subject for Navellier & Associates which can be found here.)

Now that the market has given an “all clear” and the panic selling is done, we have witnessed a seismic shift, so much so that our ratio of buying-to-selling has skyrocketed from oversold (25%) to 69% last Thursday morning. In four short weeks, we have seen hardly any selling signals and an abundance of buying. The algo-traders have clearly reversed course as their eternal thirst for mean-reversion is getting quenched.

What Sectors are Leading the Charge?

We have seen a lot of buying in Information Technology and Consumer Discretionary. Financials have also seen a monstrous recovery from being grossly oversold. This is bullish when we see buying in these traditional growth sectors on such a scale. These growth-heavy sectors are decidedly less defensive than previous sector leaders. It’s worth noting that even if this has been a monster short-squeeze, it bodes well for the future. Forget for a moment that we did extensive research into 17 prior periods of sustained selling over the past 30 years, which showed that more than 80% of the time forward returns were positive for the market from 1-to-12-months out. Forget those things. If shorts are covering and bears are running, that’s a good sign. That said, we are cautious of this level of skewed buying.

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

This year’s “January effect” was highly pronounced. Investment managers needed to deploy capital at the start of the year. This may have started the snowball rolling, but as we wrap up the best January in over 30 years, the setup is encouraging. Sales and earnings appear to be (at least) “not as bad as we thought.”

Semiconductors, the scapegoat whipping boy for 2018, are showing stellar earnings and also monstrous buying. This crowded short saw momentum slingshot around the moon to be positive. This also implies that global growth may not be as bad as previously portrayed. One other thing to notice in the current climate: Negative news isn’t working like it used to. Last year, negative stories morphed into instant fear. Now, fear is not working its usual magic. Now liquidity just needs to keep returning to the market.

Our opinion was that the market backdrop was not as bearish as the popular opinion had painted it. We said that the market would bounce and move into a more selective phase of a bull market. Our view was unpopular for the fall months as the market went south, but we believed the data that we saw.

The Five Man Electrical Band had a great 60’s hit in which they sang “Sign, sign, everywhere a sign. Blockin’ out the scenery, breakin’ my mind. Do this, don’t do that, can’t you read the sign?” The thing is, sometimes people don’t want to read the signs. They just want to believe what they want to believe.

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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