by Jason Bodner
May 2, 2023
What are the most polluting industries in the world?
If you answered fossil fuels as #1 you get a prize, but what about #2, 3, and 4? Airlines? Shipping?
It turns out that Transport and Agriculture are listed at #2 and #3 on most lists, but at #4, producing up to 10% of all carbon emissions and 20% of all global wastewater is the fashion industry, which is responsible for more carbon emissions than international flights and global shipping combined.
That’s another example of things not always being what they seem. Fashion seems innocuous until you dig deeper and see what happens in textile factories. But in the stock market, that level of intuition is hard to come by. It’s not as simple as rattling off a stat or two about water waste or carbon emissions.
We’ve come a long way since October, which found both moods and stock prices at lows. The Big Lift was called for by yours truly, using data to forecast it. That served us well as markets rose broadly by ~15% with technology and discretionary leading the way, as predicted.
Last week, I put forth what my data analysis suggested was a bullish case for stocks going forward. Feel free to revisit that, but in short: Earnings are working, the Fed is likely done hiking, and inflation is falling fast. Life has a way of dosing us with reality… with earnings came volatility. Should we worry?
Let’s dig into data for the answer, beginning with the Big Money Index (BMI). Earnings volatility brought fresh selling and renewed fears about regional banks, but the sharp market drop immediately rebounded. It’s interesting to note that the BMI barely sniffled and looks to be resuming an upward trend:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is notable because sometimes the BMI can fall when the market is still rising, which would indicate all is not well. This happened in January 2020. You can see this here – a falling BMI while the SPY rose:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
For the sake of absolute clarity, that’s not what’s happening now. In fact, it’s the opposite. The market plopped while the BMI keeps chugging. That’s healthy. We can also see a silver lining in the buy and sell data. Look here: the stock selling did pick up to levels not seen since March’s whippy weather. But it quickly seems to be dissipating. Perhaps just a rain shower and not a full-blown Tropical Storm?
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
To go further into the sunny weather, look at ETF buying and selling – we see hardly a sniff of selling. And small as they are, those are little green sprouts off to the right indicating small buying:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Next up, we visit the sectors. I’d like to acknowledge full well that there was notable selling suddenly cropping up. This was particularly focused in technology and to a lesser degree in discretionary: 33% of selling last week was observed in tech. This was offset with 34% of all buys taking place in health care.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
It begs the question: Is the tech run over? This is an important ask, as tech led us out of the depths of October’s despair (let’s not forget that it led us into that despair in November of 2019).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, when we dig a little deeper, we can see the distribution of selling within the technology sector. We see that 47% of tech selling (42 of 90 sells) was semiconductor related:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Currently tensions are ratcheting up between the U.S. and China and that’s being attributed to the semiconductor pressure in the market. That’s all well and good, but I don’t really buy it. After all, the PHLX semiconductor index rocketed up +34% from October lows, including this week’s pullback:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This screams profit-taking to me, a chance to use the headlines for liquidity after a huge run up. And while they punish semis (like ST Micro and Samsung) * with disappointing numbers, which helped drag the sector down, they lift health care. There was specific buying in the medical device category.
Despite the tech pressure, discretionary and tech continue to be the strongest sectors according to my data furthering the trend of the last few months:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now what about that earnings volatility?
According to FactSet earnings are working. As of last Friday April 28, for Q1 2023 (with 18% of S&P 500 companies reporting actual results), 79% of S&P 500 companies reporting so far have beaten EPS and 74% of S&P 500 companies have beaten revenue. And after that we had stellar earnings come out on Microsoft and META, which are major bellwethers for tech. Chipotle Mexican Grill CMG also blew away earnings estimates. So I suspect the earnings update will continue to show expectations being beaten. *
So, we have gone over a rising BMI, tech – specifically, semis pressure, and earnings. They honestly together just don’t seem that bad. But what could really get this bull market going?
Well, the Fed holds the key… we all know that. But with inflation coming in quickly, regional bank pressure continuing, and the American consumer getting worn out, the pressure is on the Fed to not overdo it. Consensus largely has the Fed’s final hike in May – if there is one at all. I’d just like to point again to the fact the Fed funds is nearly at parity with the CPI for the first time since before COVID:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Lastly, there is record cash sitting as dry powder. Check out this chart of money market assets – now at the highest levels ever recorded, dating back to 1945:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We have a potentially big bullish powder keg brewing, characterized by:
- Low liquidity
- Earnings are working: No “Earnings Apocalypse”
- Record Cash
- Fed near the end of the road for hikes
- Inflation is coming down
We’ll see, but from my vantage point, the market isn’t as bad as it seems – just like fashion isn’t as “clean” or innocent as it seems. It’s hard to know what’s real sometimes; but as Confucius said, “Real knowledge is to know the extent of one’s ignorance.”
*Jason Bodner does not own ST Micro, Samsung, Microsoft, or META, but does own Chipotle Mexican Grill shares.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
GDP Rose 1.1% in Q1; Can We Dodge a Recession?
Income Mail by Bryan Perry
The Market May Enjoy “Spring Fever” With a Positive Fed Policy Statement
Growth Mail by Gary Alexander
A Tale of Two Centuries: Growth (1950-99) vs. Debt (2000-23)
Global Mail by Ivan Martchev
Market Advances on Poor Breadth
Sector Spotlight by Jason Bodner
Tech is Back in Fashion – Will That Continue?
View Full Archive
Read Past Issues Here
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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