by Jason Bodner

May 11, 2021

Last week, the S&P 500 hit new highs, but some of my stocks got roasted. “Oh well, life goes on,” I told myself. “The earth keeps turning. It has for billions of years. Each new day brings change.”

Even the length of the day has changed. Our days are getting slightly longer – by 1.7 milliseconds every century. Going back 630 million years ago, the earth day was only 22 hours long, so count your blessings.

We rotated again last week, big-time. Stocks are acting wild and weird. We’re in what will likely be the best earnings season of our lifetimes. Stocks should be zooming, and everyone should be happy. But…

A quick glance at this chart tells the story – the S&P 500 (charted as SPY) is chugging along to new highs, but the Big Money Index started falling in February. The NASDAQ is getting punished while the Russell 2000 is also chop-city. That helps explain why we are seeing wicked rotations under the surface.

Big Money Index Graph

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

Rotations like this have gone on forever. This is not the first nor the last.  There are reasons why prior high-fliers are getting smoked, while prior deadbeats are the new highfliers. Let’s look at some of those.

Take a Fresh Look at Four New Fears Dominating Today’s Market

When it comes to the economy, there’s suddenly a lot of fear – broken down into four main categories:

  • Peak Earnings Momentum means “this is as good as it will get.” According to FactSet, 88% of the S&P 500 companies have reported earnings, with 86% of those companies beating earnings estimates and 76% beating revenue estimates. The S&P 500 Q1 earnings growth rate is 49.4%, the highest since 2010. While companies continue to blow away estimates, many are getting sold. Why? The fear is that this is as good as it will get; this is the earnings peak.
    • Comment: Yes, this is a legitimate worry. A correction will invariably come, but outlier stocks tend to continually grow. They are the top 1% of stocks and are hard to find, but I’m bullish long-term for stocks and very bullish for outliers.
  • High Valuation. com calculates the S&P 500 current P/E at 45. That’s three times the 150-year mean of 15. That’s got investors freaked out.
    • Comment: That’s a trailing P/E (price divided by earnings) of 45. FactSet calculates the forward 12-month S&P 500 P/E at 21.6. Prices are rising, but earnings are rising faster. P/Es will fall – not because prices will fall to meet earnings, but earnings will rise.
  • Taxes. Last week, showed how Biden wants to hike taxes primarily on those earning over $400,000, and corporations, but he is also mulling hitting long-term capital gains harder.
    • Comment: According to a Fidelity study, 12 of 13 times since 1950 the S&P 500 rose the year prior and during a tax hike, and stocks rose 100% of the time corporate taxes rose. The Democrats know that sinking the economy and attacking dividend income that “little old ladies” need might cost them votes. I think Biden is using a tough-talk tactic: Come hard to the negotiation table, but be prepared to leave with less, and that would still be considered a victory. Remember, though: Even if taxes rise, stocks tend to rise.
  • Seasonal Volatility: “Sell in May and Go Away”? Last week seemed to argue for May selling.
    • Comment: Seasonal volatility is real. Investors don’t like volatility, but that’s life. What goes up usually doesn’t go up forever. Strong earnings should be bringing up-volatility, but instead it’s just sloppy. Here’s what I see: Value and “re-open” plays are getting bought (like Materials, Energy, Industrials, Financials, Communications, Discretionary, and Staples). Growth is getting sold (Tech and Healthcare). The companies doing the best are getting hurt while those expected to do better are getting praised.

MapSignals Sector Rankings

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

This rotation can also be seen in the ETFs. Big ETF trading is “clumpier” than stocks. When it surges, it usually signals a shift in investor attitudes. Now it’s sell stay-at-home (growth) and buy re-open (value).

ETF BUYS and SELLS

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

That recent run-up of buying is really a rotation. Last week saw 141 ETF buys and 12 sells.

That may seem lopsided (about 12-to-1 buys), but what’s interesting is what was rotating: Text Buys and Sells

These Cathy Woods ETFs hold a lot of high-flying growth. I own some of the stocks that are constituents of these ETFs. Rumors of redemptions in her ETFs led me to theorize what’s happening. It goes like this:

Large banks (like Wells Fargo) have morning meetings. All the Financial Advisors (FAs) discuss strategy. Imagine on a Monday, their main economist puts out research suggesting the value trade has lots of room and peak earnings momentum means growth will lag. All 13,300 FAs at WF get the message. They talk to their clients who are mainly invested in ETFs. These clients are already nervous from the fears outlined above. They want out of high-risk stuff. The FA discusses how to address those fears and suggests possibly taking some profits in growth that had performed well the year prior and rotating into real-economy and value. They look over the portfolio and see ARK with a nice gain even after a pullback. They agree to sell ARK and buy dividends, value, industrials, etc.

A simple Web search shows there are currently 13,300 Wells Fargo FAs advising 175,000 clients and there are 218,000 Financial Advisors in the U.S.

All it takes is a little fear to get a big rotation underway, but all the fears I’ve outlined above should be seen in context: The economy will reopen in full force. Vaccinations are quickly getting done. There is monster pent-up demand, and taxes may not sink stocks, as everyone fears they will.

Each rotation of the earth brings night and day. There will be a new dawn for growth. There always is. And when it comes, it will be glorious.

In the words of David Byrne: “It’ll all work out, I’m just a little freaked out.”

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

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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