March 26, 2019

Did you know that you can lead a cow up a set of stairs but not down? In fact, students at West Virginia University once directed a purple-painted cow into the clocktower at Woodburn Hall. Unable to descend the stairs, the cow supposedly died there from lead poisoning. Tragic as that story may be, if you care for innocent animals, I can’t fully substantiate it. But the ghost of Woodburn Hall is a tall tale associated with WVU lore. And apparently, there are those who can still hear the poor beast bellow from up there…


This week I’ll liken the market to a cow that can climb stairs but can only stay put – or fall rapidly down.

In fact, this is what I wrote as of last Thursday’s close, when the S&P was up over 21% in three months:

This week has seen a strong surge in the broad markets. What we have seen the past weeks, as the market has built the right slant of the “V” shaped recovery, is growth leading the pack. As of last week, the Russell 2000 had been the top performer since the December 24th low. This week has seen excellent strength in the NASDAQ, up 2.73% for the week. Its pop has caused the NASDAQ to become the top performer since Christmas, up an eye-popping +26.58%. This can be seen clearly in the Information Technology Sector index, powering forward +4.06%. It’s up +30.3% since Christmas. The sector is quickly catching up to the PHLX Semiconductor index – which is up nearly +35% in the same period.

Sector strength has also been seen in Energy, Consumer Discretionary, and Industrials. These sectors have a strong growth concentration. This is reinforced by the Russell 2000 Growth index, surging 28% since Christmas. The S&P 500 Growth index is also the clear winner from the S&P indexes. The laggards are the Dow Jones Industrial Average, S&P 500 Value, Dow Jones Utilities, S&P 500 Utilities…. You get the picture. The big buying has been a clear redeployment into growth. This is decidedly un-bearish.

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

Then Friday happened. The broad sell-off was triggered by the spooky inverted yield curve: Short-term interest rates were slightly higher than long-term rates. Germany’s awful manufacturing data caused the country’s short-term rates to go momentarily negative. When it costs you money to lend to a government, that’s not usually a good sign. So that stirred up fear over here in the U.S. and re-stoked the “growth is in trouble” fears. That equals recession fears, which significantly altered the picture in just one day:

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

What’s more interesting (to me) is an uptick in ETF activity. I have seen a lift in ETF buying in the past few sessions, so I thought I would take a look at any “trips” in ETFs and stocks lately.

What I found was quite interesting…

What Unusual Institutional Buy/Sell Activity is Telling Us Now

The first chart shows us the number of trips each day. These “trips” merely measure the number of stocks and ETFs that trade in unusual volume and volatility. Notice the surge in trips coinciding with the trough of the market in late December. But also notice the steady trips since then, as the market has recovered. Also notice the spike in trips as the market hit new four-month highs in the last two weeks.

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

Now let’s look at unusual buy and sell signals. First, we see a monstrous spike in ETF sells at the late December lows. Then we see an immediate shift, albeit with less intensity, of ETF buys, as the market rallied. This past week has shown us the highest ETF buy signal totals since June.

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

This sets up to be quite bullish. To reinforce what I mean – and what these charts are telling us – there was monster selling in December, coinciding with peak ETF selling. Then the buy signals started in early January and have been growing slowly and steadily since. Again, this is quite bullish for the mid-to long-term, however, big ETF buying can also indicate intermediate peaks, as they have done in the past.

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

Now let’s just recall where the buying has been focused. It’s been in the Growth sectors: Infotech and Consumer Discretionary. In fact, 20% of all buy signals since the market lows have been in Software and Semiconductors. The bears calling for the bounce before the next leg down may be missing the picture. If the investment community were poised for a fall, it would be positioning long in defense: Utilities, Staples, and Real Estate. Growth-heavy sectors would be out of favor, but we observe the exact opposite.

Remember a while back, when I talked about how some big stocks were in so many ETFs? (FB is present in nearly 200 ETFs.) Capital is flowing into these names in a big way. As the FAANG stocks are now making unusual buy signals, it stands to reason that we are beginning to see ETFs buying more FAANGs.

(Navellier & Associates does not own any of the FAANG stocks except Netflix and Apple in managed accounts or our sub-advised mutual fund.  Jason Bodner does not own any FAANG stocks in personal accounts with the exception of Google.)

This Friday we saw regional banks (lenders) get pounded and Utilities (yield instruments) get bought. All this means is that the market has been grossly overbought. I’ve been saying this since our ratio of buying to selling went overbought on February 6th. NASDAQ has risen by more than 26% since Christmas. The market obviously needs to vent some steam. An inverted yield curve is a great catalyst to consolidate a little. It’s worth noting that, should a recession be headed our way (inverted yield curves are touted as a recessionary red flag), they typically come 12-18 months later. That’s a long lag time in a bull market…

All of this just reinforces my belief of what caused the market action of the past months: First, ETF forced selling caused massive pressure on stocks and broad equity markets. As soon as the flush was complete, the reversal was swift and intense. Unusual buying focused in growth-heavy sectors kicked into high gear.

The “Big Bad Bear Market” (that never came) after late 2018’s technically-driven drop won’t likely come for a long time. I like bears – the cute and cuddly kind that my kid sleeps with. Those are likely the only bears I’ll see for a while. The truth is that bears are good and necessary for the market. When the bulls are right, they need to “seem wrong” to others, so they’ll take the other side of the trade. And when the bears are right (as they eventually will be), the bull will fall down a few flights of stairs from the tower – only to dust himself off and climb back up again. A century of rising equity prices says so.

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

Humans are herd-mentality animals. We are easily swayed by emotions. So, when fear gets whipped up like a dust-devil out of nowhere, it’s not long before many start selling. The emotion gets amplified, and suddenly it’s unpopular to go against the grain. Nixon-era economist Edgar Fielder was onto something when he said: “The herd instinct among forecasters makes sheep look like independent thinkers.”

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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