April 16, 2019

Sometimes crucial information gets left out. Check this out: In the first (1908) publication of the Boy Scout’s Handbook, the original Boy Scouts’ Motto ‘Be Prepared’ was followed by the words “to die for your country if need be…” Somewhere along the way, someone (brightly so) decided that telling young boys to prepare for death wasn’t as appropriate as the simple two-word motto: “Be Prepared.”

I was in the Boy Scouts, and I think making pine-box derby cars would have been less fun thinking that I was rehearsing for a patriotic death. I don’t think my 11-year-old brain would have handled that well.

I think similar information exclusion is happening in how markets listen to the noise and ignore key facts.

I think the main leave-out is a focus on what professional investors – like hedge funds and institutions – are doing. But to be fair, they work hard to keep their activities quiet. It doesn’t help them if too many people know what they are buying, until they are done buying it! But this is where I focus my research. I believe secretive unusual institutional buying or selling can help us decipher market movement.

The market recovery since December 24th has been incredible. At the time, I wrote that the immense selling of late 2018 was caused by forced ETF selling. Here is the exhaustive detailed white paper (“What Really Caused the Market Meltdown in 2018?”) which outlines that case in detail.

Since then, buying has been in growth-heavy indexes, sectors, and industries. S&P 500 Growth and Mid-Cap 400 lead value substantially. The Russell 2000 and NASDAQ significantly outperformed the DJIA. Russell Growth is crushing Russell Value. And the PHLX Semiconductors is up 40% since Christmas.

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

Big buying since Christmas has been in Information Technology. This past week is no exception as 30% of Infotech was bought in an unusual way. Heavy growth is in favor along with Consumer Discretionary.

Selling wasn’t really anything to take note of:

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

Software and Semiconductors led the charge last week. Let me explain why I think that is the case:

Why Software and Semiconductors are Leading the Charge

We live in a modern world. Everyone is constantly connected to the internet. Even at home, my wife and kids are often on their phones, playing on their Xboxes, or watching Netflix. But when I settle down to work at night, I often run into internet loading issues. Sites load slowly if at all. Files syncing to my cloud storage hang up. And watching videos? Might as well not bother. The internet we all need grinds to a halt.

There’s simply not enough bandwidth for the expanding world of internet demand:

  • There are 75-billion+ devices connected to the internet.
  • Wireless customers experience calling problems and slow connections 16% of the time.
  • From 2015 to 2017, 4G mobile broadband errors were up 40%.
  • A 2017 Google study said the average load time for mobile websites is 22 seconds—but 53% of visits taking longer than three seconds to load are abandoned.

We’ve reached the technological equivalent of needing to widen highways from two lanes to four lanes.

But there’s a solution… 5G is “the next generation of mobile internet connectivity, offering faster speeds and more reliable connections on smartphones and other devices than ever before.” That’s according to the TechRadar website (which, ironically, finally loaded on the third try).

Among other things, 5G will enable:

  • New connections to Internet of Things networks (where devices like household appliances are all connected through the internet)
  • Autonomous driving
  • Faster broadband wireless speeds (10 to 20 times faster than what’s currently offered)
  • Lightning-fast downloads, smooth streaming, and lower latency (fewer delays)

The need for 5G networking is clearly here and now. Semiconductors will be in more demand than ever.

Let me reiterate my methodology on market liquidity and the ratio of unusual buying and selling: Each day I look through 5,500 stocks to see which are being traded unusually. On average I get 500 a week. That number has been dwindling recently, as the first chart (below) suggests. The second chart shows the big ETF flush-out, which paved the way for strong buying since then, which is in growth, specifically in semiconductors. But as liquidity wanes, we just need to watch how the market takes earnings season. Thin volumes and negative news can fuel volatility as algo-traders take advantage of those conditions.

Finally, the ratio has ticked back up into overbought, but on decreasing volume. I’m not sounding any alarm bells, but it’s just a market condition to note. Thinner volumes and an earnings season upon us.

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

So, the bull is back after a winter of darkness. The message has been clear: Unusual institutional buying can show us what we need to know – if we know where to look.

As Henry Ossawa Tanner said, “Get it – get it better or get it worse. No middle ground of compromise.”

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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