May 14, 2019

Did you know that half of the world’s pigs live in China? President Trump did, so he decided to vent.

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

Let me explain…

Last Friday, the market closed at all-time highs. Coincidentally, headlines were heating up about Trump’s tax filings and his stated $1.17 billion losses spanning a decade between 1985 and 1994. At some point, Trump claimed more losses than any other individual taxpayer. Love him or hate him, this is guy knows how to work the system. Here’s my point: When the screws tighten on Trump, he’s a master deflector.

Last week found Trump in the crosshairs for massive tax losses. His Attorney General was being held in contempt, and his son was being subpoenaed. What to do? Insert some inflammatory trade war tweet and you get a perfect shift of focus… and boom! We get a market reaction.

Our new market norm (for now) is a period of low volatility – followed by excessive volatility. The VIX index is not perfect, but it can illustrate my point. Typically, when the VIX bottoms out, it coincides with market highs. When the VIX spikes, it coincides with sharp market drops, like this chart demonstrates:

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

On April 18th, the VIX hit a near-term low of 12.09. Earnings season kicked up the volatility, and then Trump’s trade tweet-a-thon sent the VIX surging to a May 7th spike at 19.32. This is where the media loves to cite big numbers. This is when you’ll see a headline like this: “VIX spikes 60% as trade worries roil markets!” Snappy headline, right?  I made it up myself. Technically it’s true (19.32 is 60% higher than 12.09) and it coincided with a fall in the S&P of -3.74% for the week. That’s ugly in isolation, but the S&P 500 peaked at a +25.3% rally from its December 24 lows. It now sits 22.6% higher than on Christmas Eve. Some giveback is expected, especially when earnings season is agitated by trade rhetoric.

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

Note: This is the first week we’ve seen some decent selling since January. The selling was even across the sectors and sells outnumbered buys by more than 2 to 1. If the market weren’t near highs, this might be troublesome, but with so many stocks extended, drifting lower on any spike in volume is not hard to do.

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

Chinese President Xi says the trade deficit is the lowest in three years, but Trump says he wants to see more progress. I have a different view: I think this trade war is about 5G. If you want fast download over-wireless networks, then 4G won’t cut it. 5G will bring speed and usher in the next tech boost for the information age. The U.S. wants to win – or at least have favorable trade terms with China.

5G may account for the monstrous bump in Software and Semiconductors since Christmas. The market previously assumed a trade resolution. Investors piled into tech that would benefit the most from a deal. (Semis and Software enable 5G to be embraced by both superpowers.)  Even Apple (AAPL) became a believer when they set aside their difference with QCOM (QCOM) to work together to develop 5G.

(Navellier & Associates owns Apple and Qualcomm in managed accounts and our sub-advised mutual fund.  Jason Bodner has no position in Apple, but as a long position in Qualcomm in personal accounts.)

Five Reasons for Buying Good Stocks on Dips

So, am I worried about this latest market chop?

Well, the data tells me not to be worried. It also tells me to “buy the dip.” First things first: Trump and Xi may both want to look like winners, yet neither can afford to surrender national pride. Trump has a re-election campaign soon. He doesn’t want to be perceived as derailing our economy. Xi is planning a 70th anniversary celebration of the Communist Chinese victory in October 1949. He knows he needs America  as a trading partner to avoid sending China’s economic growth into a tailspin, so we need each other!

I see a resumption of the bull market soon, because:

(1) When markets freak out, interest rates trend lower as capital flees into bonds. Ironically, that makes stocks become more compelling. As I pointed out before, dividends are taxed at long-term rates of 23.8% while bond interest is taxed as ordinary income, peaking at +40.8%.

(2) Sales and earnings are beating estimates! With 78% of the S&P 500 reporting, FactSet says that 76% reported positive EPS surprises and 60% reported positive revenue surprises. Revenues are up 5.2% y/y.

(3) Stock buybacks are rising. Q1 saw $227 billion of buybacks. We should see more as earnings season ends. Remember, when a company announces a buyback, they often wait for prices to fall before buying.

(4) Market dips bring in more buyers. This is different behavior than late last year. Look at last week’s 5-day intraday price action of the S&P 500, showing the persistent re-entry of buyers:

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

(5) Finally, bull markets need these periods of retreat in order to coil up, and then power higher.

Don’t give into the fear-mongering news media. Last week marked a clear congestion point, spurred by a mid-earnings-season trade-tweet. But the media will seize on any opportunity to fan the flames because they know that we humans can’t resist emotional responses over logic.

As security specialist Bruce Schneier said: “The user’s going to pick dancing pigs over security every time.”

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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