April 2, 2019

The best credentials don’t always lead to success, and success doesn’t always come from those with the best credentials. Consider that none of the four Beatles could read or write music, yet these four guys are considered to be the greatest rock band in history, and the Lennon-McCartney writing team dominated the list of the greatest songs of the 1960s. They had the most #1 hit singles in a year, the most albums and singles reaching #1, and the top 5 records in a week (April 4, 1964), yet they couldn’t read or write a note.

That’s only one example. Just look at today’s self-made billionaires who didn’t graduate college. Mark Zuckerberg, Steve Jobs, Michael Dell, David Geffen, Dave Thomas, and even John D. Rockefeller – none of them finished college. Neither did Kim Kardashian, but hey, you can’t argue that she’s not successful.

My point is that information we see daily, even if it comes from credible sources, may not help us much.

Right now, there is little left of the hangover that came from the air-pocket on Friday, March 22nd. That was the day world stocks had a tantrum because of the inverted yield curve. The Russell 2000 swooned more than -3% that day. Here we are, over a week later, so let’s have a look at how stocks are doing now:

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

The first thing to notice is that, by and large, stocks are up. What’s interesting to me is that with the media drum-beating a “growth slowdown” and an “inverted yield curve” prefacing a recession, stocks don’t care. In fact, small-cap stocks decided not to tune into the newscasts. The S&P Small Cap 600 and Mid Cap 400 outperformed value handily. The S&P 500 Growth index lagged small caps as well, but let’s dig a little further. The growth-heavy Russell 2000 surged 2.25% the past week, but growth-heavy NASDAQ lagged against the other major indexes – so what gives? Let’s look at the sectors to dig out some clues…

Growth Sectors Lead (with One Exception)

Industrials, Financials, and Materials led. The growth performer was Consumer Discretionary. Those stocks surged nearly 2% for the week. When we get to Information Technology, we start to see what has hampered growth stocks. Infotech was one of the weaker sectors. What’s dragging it down can be seen in the biggest winning segment since Christmas Eve. The PHLX Semiconductor Index has rallied over 30% since the lows were put in on December 24th. Last week, however, that index was down -0.35% during a strong week everywhere else, so the semis are holding back the NASDAQ, which is holding back growth.

Utilities and Communications declined last week. To me, this means that growth (ex-Semiconductors) is still leading. But considering the previous strength of the semi’s sub-group, there is no need to worry.

Let’s pause to deconstruct the yield curve scare: On March 22, the 3-month Treasury yield surged higher than the 10-year Bond. This spooked everyone and caused stocks to sag. The prevailing logic was that lending short-term yielding more than long-term is a warning sign. However, the typical measuring rod for this recessionary crystal ball is the 2-year inverting over the 10-year, and that has not happened yet.

It’s also worth noting that while all nine prior recessions were prefaced by a 2/10 yield-curve inversion, not all yield curve inversions lead to recessions. Furthermore, recessions typically occur 12-18 months after these inversions (if they come at all). And finally, former Fed Chair Janet Yellen came out last week and said on the record that she believes the data is strong and should not lead to a recession.

The bottom line is that the “fear of the week” is based on flawed logic with a lot of skewed perceptions.

Here’s what I think is really happening: the market was blowing off some steam on March 22. The ratio of unusual buying to selling – which I focus on – has seen one-way buying since January. A measure of buying over selling at or above 80% is “overbought.” That trigger was hit on February 6th and the market remained overbought for 34 trading days, until last week, March 27, when we slipped back under 80%.

Look at the table below to see how selling hasn’t picked up so much as buying has slowed a bit.

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

Sometimes the most reputable sources may have it wrong. The data is there for all to see, if you want to see it. Hellen Keller said it well, “Keep your face to the sunshine and you cannot see a shadow.”

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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