3-29-22: New Sector Leaders as Stocks “Spring Forward”

by Jason Bodner

March 29, 2022

Investors in 2022 need thick skin. Volatility, fear, and rhetoric are running high. Morale and certainty are low. The outlook may feel bleak, but we’ve faced grim times before.

If your investing confidence is low, it may help to take inspiration in the toughest animal on earth. It’s not a bull, or a bear, or even a lion. It’s a tardigrade, a tiny, rugged creature who can teach us a thing or two about dealing with extremes. At about 0.5 millimeters long, it can be found virtually anywhere and everywhere. It can withstand temperatures as low as -272⁰ C (-457⁰ F) and as high as 150⁰ C (302⁰ F), a range of 759 degrees Fahrenheit.

Tardigrades have been observed to survive in space. And in perhaps the most inspiring show of toughness, they can handle immense pressure, up to six times the pressure of the ocean floor.

How are some investors seemingly invincible to pressure – like Warren Buffett, 91, and his even older partner, Charlie Munger, 98 – while most of us get frazzled at the first sign of pressure?

In this week’s column, I’ll attempt to evoke the stoicism of an investing tardigrade, along with some much-needed optimism as this roller-coaster first quarter of 2022 draws to a close.

Are Stocks Finally Finding Their Footing?

So, let’s begin with stocks: Are they finally finding their footing? Or is this just a quick respite before more pain? For me, the first place to take the market’s temperature is the Big Money Index (BMI), which measures overall money flows. As I have been saying here, the BMI has been range-bound for months, but for the past few weeks we’ve seen an encouraging up-trend driven by energy and utilities. We’ll dig into that in a moment, but first look at the BMI’s recent lift:

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

This is simple supply and demand. There is recently more demand for stocks and ETFs than supply. This is after a clear imbalance the other way for much of the last six months. Below, we see a recent uptick in buying with ETF buying less intense, but the selling has clearly dried up:

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

Now let’s dig into some sectors to see how money is flowing. First, let’s look at the buying. Since the beginning of the year, buying has been non-stop in energy. Recent consolidation of the space is reflected in the drop-off of bright blue bars, but the strength is undeniable.

We’ve also seen substantial buying in materials and utilities stocks:

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

While those three sectors got big love, tech, healthcare, and discretionary stocks have been cast aside. We see that below, but also pay attention to the recent sprouts of buying. Just as buying has slowed in energy, materials, and utilities, selling is slowing in tech, health, and discretionary. And there are shoots coming out of the ground like after a forest fire:

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

It’s too early to get carried away, but looking at last week alone, we see some constructive action. Here we see pie charts of the huge buying and selling by sector since the start of the year.

You can clearly see the sector dominance: Three sectors account for over 55% of all buying through March 15: Energy (25.7%), financials (16.1%), and materials (13.5%), while nearly 54% of all selling is found in tech (22.8%), discretionary (16.5%), and healthcare (14.5%):

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

One week is a very small sample size, but it is an early indication of the storm passing.

Look how starkly the one-week sector buy/sell breakdown looks compared to the entire year until March 15^th. Energy still led the buying, but for the first time in what seems like ages, tech saw more buying than selling. That’s the good news. The bad news is that consumer discretionary stocks got smoked last week (accounting for 38.5% of all selling):

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

What’s also encouraging is that some familiar outliers are suddenly starting to see fresh buying. That comes when stocks start showing signs of accumulation, based on these few conditions:

1. A spike in volumes with rising prices.
2. Prices higher than their rough 3-month highs
3. Three-month lows are established

So, for traders and short-term market players, the violent rotations out of tech and health into energy and utilities might be calming. That said, this might just be short covering in popular, beat-up sectors and profit-taking in the winners. We won’t know until we know, but typically when shorts cover, it’s because the trade is over. (If there were more downside, why cover?)

Historically, short covering can spark a bull run. It’s too early for me to get short-term bullish on tech, but I remain an all-in long-term bull on tech.

That hyphenated modifier, long-term, brings me to my next thought. Headlines are terrible. The new Big Three headlines at quarter’s end are (1) the war in Ukraine, (2) COVID variants hitting the news again, and then there’s (3) this horrendous inflation: When will it end (if ever)?

#1: The war will end, or at least abate. Worst case, if the conflict devolves into a world war, we have survived two prior ones, and a 45-year Cold War. And frankly speaking, if we shouldn’t be so lucky this time, we’ll have bigger fish to fry than our portfolios. So, I won’t fear that, either.

#2: As far as COVID goes, it is waning and will eventually fall to the threat level of the annual flu bug. That is until the next pandemic which will inevitably come.

#3: Inflation may persist for a while. Already strained supply chains are getting dented even more from the disruptions caused by the new war. Russia and Ukraine combine for substantial supplies of natural and agricultural resources, but that’s because we (mostly Western Europe) grew to rely too much on the region. As an adaptive species, we will change our production or even reliance of these resources if the disruption is permanent, though I don’t think it will be.

Given our current environment, the intermediate-term-horizon investor should look for companies that will benefit from the current disruption and inflation. The long-term investor should try to identify opportunity-punished sectors that are essential for the progress of mankind.

At age 98, Charlie Munger offered this sound perspective on the current dilemma:

“If I can be this optimistic near death, you all can handle a little inflation.”

Important Disclosures:

Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.

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