April 30, 2019

Did you ever see something you can’t un-see?  The next time you go to your grocery store, pay attention to the eyes on cereal boxes. You won’t be able to un-see that every mascot is looking down. Why is that?

Messed up as it may be, the eyes are positioned so that the mascots can make eye contact with kids. This helps get attention and establish trust. That way, kids are more likely to ask their parents to buy cereal.

So it goes for me and my monitoring of unusual trading. It all started years ago, when I got a client order like I had never seen. My job was to match buyers and sellers of large blocks of stock and options. The order was from an activist investor taking a huge stake in a company. When someone needs to buy millions of shares, the fundamentals go out the window, at least temporarily. A nearly bankrupt company’s share price surged 70% in a few weeks, solely because my client was a buyer.

It was shocking to witness first-hand what impact big investors can have on a stock. They can literally move markets. It changed the way I see markets, and now that image cannot be un-seen. That’s why monitoring what big institutional investors are doing “unusually” is so crucial to me.

Last week saw earnings season begin in full swing. And while the indexes are up, there is some volatility beneath the surface. According to FactSet, 46% of the companies in the S&P 500 reported Q1 results. 77% beat EPS, which is above the 5-year average. The average beat is +5.3% higher, also above the 5-year average, and 59% of companies that reported beat sales estimates. These are solidly strong metrics.

We may see the first year-over-year decline in earnings since Q2 2016, largely due to tough year-over-year (y-o-y) comparisons. Six sectors are reporting y-o-y growth in earnings, led by Health Care and Utilities. Five sectors are reporting y-o-y declines in earnings, led by Energy and Infotech, which leads the pack for earnings beats at 96% (see the table below):

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

A noteworthy long-term trend is that earnings growth is tightly tied to the market’s appreciation. Notice that when there were hints of earnings deceleration, it had a negative impact on the market.

The most recent downdraft seemed like overkill, relative to the temporary EPS slowdown:

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

The macro picture sets up quite nicely for continued strong earnings. Trade resolution is now on the lips of the media. Equity performance since the December 24 lows has been stellar with Infotech and Semiconductors still supreme. Growth performed well last week with S&P 500 Growth, Russell, NASDAQ, and the Russell Growth indexes all surging higher. The individual sectors are also responding well. Last week saw Health Care take a belly-flop. This week saw it bounce as the best performing sector of the week, +3.7%. Communications was 2nd best at +2.7%, followed closely by Utilities and Real Estate. On the surface, though, this is defensive sector action and warns of possible volatility ahead.

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

What are the Big Buyers (and Sellers) Doing Now?

Back to unusual institutional activity: We saw big buying in Tech, Industrials, Financials and, to a lesser extent, Energy. Selling was less than the week prior. Note the deceleration of Health Care selling.

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

When looking at how the sectors stack up, MAP ranks all stocks that can be easily traded by institutions – about 1400 on average, and then averages the score per sector. We see a mimicking of recent price action: Tech, Industrials, and Discretionary are top in terms of both technicals and fundamentals, while Materials, Telecom, and Health come in last. Once again growth is tops…

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

Lastly, let’s look at unusual buying versus selling. As you can see below, the Q1 surge in unusual buying has managed to sustain itself quite well in April. Selling has picked up slightly recently. This is a good thing as a balanced ratio of buying to selling is healthy for a sustained bull run in stocks. I usually like to see around 2:1 buys versus sells. That is the daily average of unusual buy-to-sell signals (66% buys and 33% sells) necessary to sustain a healthy uptrend.

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

In grocery stores, little eyes peer up at cartoon cereal characters gazing down at them, while parents just see breakfast food boxes. Likewise, markets ebb and flow in a sea of everyday buyers and sellers, while I see big players trying to buy quietly. Sometimes a different perspective is just what’s needed. As Pablo Picasso said, “Others have seen what is and asked why. I have seen what could be and asked why not.”

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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