May 7, 2019

There are 25 billion chickens on earth. What’s cooler is that the chicken is the closest living relative of the Tyrannosaurus Rex. But the bird made news for a ridiculous reason last week. House Democrat Steve Cohen was trying to skewer Attorney General Barr for blowing off his hearing, so he sat down and started eating a bucket of KFC. His performance got mostly sour reviews, but I think that misses the point. He knew that an old dude crushing some fried chicken is entertainment, so he would make the evening news!

There are many perma-bears on the market, but I’m a perma-bearish on the financial media. I think it does the same thing as putting cameras on the “finger-lickin’” publicity stunt. Most daily noise takes away from what is really going on behind the scene, so let’s put the drumsticks down and take a good look.

I just spent a week at a conference where bright minds gave their best investment ideas. I’ll get to mine in a moment, but a main theme was that many people are bearish on stocks. I heard many reasons – like high valuations, historical analogs, and simply “the bull market is 10 years old,” which was stated as a foregone conclusion, like “everyone knows the market has to fall pretty soon; it’s only a matter of when, right?”

I heard this right before I told a room filled with 100+ people why this big bull is just getting started!

On a conference call with Louis Navellier on Friday morning, he said it best: “There’s just nowhere else to go!” He’s right. Europe is a mess. Germany and Italy teeter in and out of recession. Brexit is a major ulcer. China has made progress but hasn’t resolved its trade issues with the U.S. Latin America is just downright ugly, especially with the woes in Argentina and Venezuela. (Talk of civil war is never a good thing for investors’ nerves.) These pain points help lure trillions in capital here to the U.S.

When foreign capital arrives, Treasuries don’t offer as compelling returns as equities. Dividends earned on U.S. stocks are taxed at long-term capital gains rates, while bond interest is taxed at ordinary income (higher) rates. Bonds also don’t offer the capital appreciation potential of stocks. With 78% the S&P 500 reporting earnings, 76% beat estimates and 60% beat revenue estimates. That isn’t bearish, people.

Semiconductors and Software Lead the Tech Charge

My investment idea at the conference came from the big buying I see in the market. I’ve been talking about this for a long time here. Without going over the same ground, the biggest buying I am seeing is in Semiconductors and Software. I think these two groups are raw fuel for the bull market. When big investors, like hedge funds and institutions, plow cash into these groups, it’s very bullish for stocks.

Last week saw broad strength, especially small caps, despite turbulence under the surface. Earnings season is seeing outsized reactions to reports. Some companies meet or beat earnings, but if lower guidance is issued, they pay the price – literally. Stocks have been routinely seeing 10%-20% downside reactions to lower guidance warnings. But here’s the thing: I think good stocks will bounce right back.

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

In our MAP Score, we saw big buying again last week in Tech, Industrials, and Financials. Selling hit Energy, Health Care, Telecom, and Materials. This general theme has been playing out since the Christmas lows. Looking below, based on MAP scoring methodology, Infotech is our strongest sector, but Semis and Software are the standout tech industry groups. This is the power of the current tech rally.

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

I decided to comb through our 30 years of data to see how the current buying in Software and Semis compared to our nearly 650,000 overall signals since January 1, 1990. The first thing you should know is that big buying outnumbered big selling for all stocks in that time period by 58.5% to 41.5%. That makes sense, reflecting the overall bullish trend in that time period. Looking at the sectors, I noticed that Health Care, Infotech, and Utilities saw the biggest imbalance of buying versus selling. The weakest sectors in terms of unusual buying were Real Estate, Energy, and Telecom.

So let’s focus on Information Technology: When we dig for what accounted for that buy imbalance, we see (you guessed it): Software and Semiconductors. What’s significant is 62% of signals in Software and semis since 1990 were buys. But when you get to the bottom of the table, your eyes should pop. Since New Year’s 2019, Semis saw 95% buy signals and Software saw 90% – that’s unprecedented.

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

Don’t let the market’s chicken-eaters distract you from the real trend. The game is Software and Semis. The biggest players have been fanning the flames for a bullish growth trend. Pay attention to the big stuff.

As Mark Zuckerberg said: “Figuring out what the next big trend is tells us what we should focus on.”

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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