May 15, 2018

They say, “No pain, no gain.” Sometimes that can be profoundly true. Consider the case of Jason Padgett, an athletic kid who never understood much math as a student. He never made it past pre-algebra. One day he got mugged outside a bar and sustained a heavy beating, which injured his brain, but in a way that changed him significantly. When he healed, he saw the world in pixels and geometric shapes. He suddenly understood the concept of “pi” and could hand-draw complicated fractals, like the one below:

It seems the market shock that began last February and the subsequent negative market performance may have been like an injury from a bar room brawl, which helped us to see more clearly. Last week saw some impressive performance. All the broad equity indexes were up more than 2% for the week. This brought the Dow Jones Industrial Average and the S&P 500 positive for the year. Strength came from a huge week in energy: up nearly 4%. Financials, Industrials, and Information Technology were all up more than 3 % for the week. Utilities and Consumer Staples were the only losing sectors for the week.

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

February’s bomb blast rocked the markets. Volatility exploded as volatility products imploded. The ripples were felt deep and wide and the market has seen heightened volatility since. There have been significant sector rotations and unpredictable price action. But all of this has been taking place with a backdrop of stellar sales and earnings reports.

Here’s what’s interesting: I noted last week a visible slowing of sell signals mixed with an uptick of buy signals. Since then, the S&P 500 has rallied +2.29% as of this writing. The VIX has had some notable behavior as well. The CBOE Volatility Index is at 13.32 right now and hasn’t closed this low since January 26th. Remember January 24th is the date my indicators said the market was overbought and signaled a warning of pending volatility and lower prices. As the volatility drains out of the market and buying seems to resume, these are both good signs. So where do we go from here?

Where the Key Sectors Stand – Two-Year Charts

The S&P Information Technology Index closed at 1233.97 on March 12th. After that, there was talk of a “tech wreck” and slowing growth all over the media. On May 10th The index closed at 1229.46: less than 1% off its all-time high set in March. I admit, I have a special place in my heart for Infotech as so much of the global market innovation and future growth seems to reside there. This recent bullish action is good for the market. If Technology leads, it means growth is alive and well: Despite the peak growth momentum concerns which pressured the market in recent weeks.

The January 26th Market peak coincided with the peak for Consumer Discretionary Index. It closed that day at 868. Right now, it’s trading at 833.83 which is less than 4% off its all-time high. The sector is seeing recent strength from more positive sales and earnings reports.

Energy (XLE) has rocketed 10% higher since April 10, when I first started to see signs of unusual institutional buying in Oil & Gas stocks. It’s soared almost up to January highs after a -13.5% fall. That’s the great news. The not-so-great news is that it appears we are getting dangerously close to overbought levels. I think we should expect a pullback in energy (O&G stocks particularly) in the near future.

The S&P 500 Financials Index also peaked January 26th at a closing high of 490.56. As I write this, the index sits at 467.95; just over 5% from its all-time high. For those who may cringe at down 5% from the high, I’d like to remind you that on June 27, 2016 it closed at 286.62. Put in perspective, today’s trading level represents a 61.5% rally in less than two years. Wow!

What about weakness? Let’s start with the badly-injured Consumer Staples Index, which closed January 24th at 601.5. As I write this, it is trading at 507.33, down 15.5% from that peak. For Telecommunications we have to look further back for its all-time peak. This was December 3, 1999 at 311.42. If we look back at the two-year high, made July 6th, 2016 at 183.02, the S&P 500 Telecommunications index is now at 146.55, down -20% from the 2-year high and -53% from the all-time high. Ouch!

Here is what these two-year statistical stories (plus CBOE volatility) look like in chart form:

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

I am bullish. We may experience a “steam vent” or pullback of some kind, but the market is trying to find its feet as the aftershocks from February’s shock. Growth-heavy Info-tech is leading again, along with Energy, Financials, Industrials, and Consumer Discretionary. These are the sectors we want to see leading. They are growth and revenue engines for the market and the economy. While I have heard fear and talk of the yield curve approaching inverted levels, recession still feels far away. Inflation has not run rampant yet and the economy and backdrop for American companies still seem favorable to keep fueling growth.

As we meander along to potentially all-time highs around the corner, the focus should remain clear. Find the best quality stocks with superior fundamentals. These companies usually continue to grow. These are the companies to bet on. And with the market’s wind at our backs, stock picking should be more fun.

The markets are powering higher after showing some intriguing signs of reversal. This may mark progress since February. It could be the start of a new impressive leg-up for stocks. The data is supporting a lull in volatility and a potential resurgence in Info tech. Should this and other growth sectors regain strength, it could lead the market higher. Enduring this volatility has not been fun, but it may have been productive.

Shakespeare said it well: “Let me embrace thee, sour adversity, for wise men say it is the wisest course.”

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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