by Jason Bodner

May 27, 2020

Simple stuff gets confusing sometimes. For instance, according to the national league of cities, the most common street name in the U.S. is Second Street. First Street is the third most common street name. Third Street is the second most common, while Fifth Street is the sixth most common.

Who’s on first?

The stock market is also confusing a lot of people right now. It seems simple: The news is bad, across the board. There’s a pandemic for the first time in generations, people are dying, and the economy has taken a beating for the ages. There’s also bitter political infighting. Stocks should go down right? But they’re not. They’ve recovered most of their March slide in what turned out to be the shortest bear market in history.

Bear Market Bull Low to Bull Market Entry Timeline Image

“But how can that be?!”

“It just doesn’t make sense!”

“It’s a head fake before we drop another 50%!”

These are just some of the comments I’ve heard, but the fact remains that stocks surged mightily in three days. The definition of a “bull market entry” after a “bear market low” is a 20% recovery from the market low, and the Dow Jones Industrial Average rallied 21.3% from Monday, March 23 to Thursday, March 26 – just three days – the quickest bear market low to a bull market entry on record, as tracked by Dow Jones Market Data Group – a monster rally. You know what that means? It means sad bears:

Sad Bears Image

In the last two months, the major U.S. stock indexes gained between 31.6% (Dow) and 35.9% (Nasdaq), averaging +33.7% from the depths of despair and uncertainty on March 23rd (upper right box, below):

Major United States Stock Indices Performance Table

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

Turning to the 11 S&P sectors, here are the sector index performances since 3/23, sorted high to low:

Standard and Poor's 500 Sector Performance Table

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

On the top of the list, energy rose almost 60%, but rising from extreme lows. Materials and Discretionary stocks are the next best performers. I have talked a lot about Health and Tech stocks leading the buying out of the depths, but the biggest bounce back came from one of the weakest groups: Energy.

The way I rank sectors for technical and fundamental strength shows Energy way down near the bottom:

Sector Strength/Weakness Table

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

We can see from this table that growth sectors topped value, with leadership in Tech and Health Care.

Looking at these two charts may make you feel like you’re at the intersection of the 6th and 2nd most common street names, near the intersection of 1st and 3rd but neither 5th and 3rd nor 2nd and 1st intersect.

Memolition Direction Image

As I’ve explained in the past, I gave up on the futility of trying to constantly justify and explain market actions. Things happen in life all the time that defy explanation. Even more often, we just have to deal with them and adapt. Can you think of a better example than a global coronavirus pandemic arriving just after an impeachment and forcing hundreds of millions to stay locked in their homes for months?

What’s more important – trying to figure out why, or figuring out how to adapt to the new environment?

That is what investing is all about. Too much time and energy is unnecessarily wasted trying to fit events into nice little shiny boxes. Here’s the reality: Sometimes they fit, sometimes they don’t. In my opinion, having fluidity and flexibility will yield not only better results, but a more peaceful and harmonious life.

Don’t fight the tide, and don’t fight the tape. Just go with the flow.

When the Big Money Index (BMI) went oversold, I knew it was time to buy stocks. Extremes don’t last forever, especially when oversold. Things look a little different on the other side. Now that the BMI is heavily overbought, the main difference is that it can stay that way for a while. I wrote last week that the longest overbought period in the past 30 years was over three months (93 calendar days, 65 trading days).

We have now been overbought for 13 trading days. It could last much longer, or it could end tomorrow. The 30-year average says to expect overbought to end after 20 trading days – or another week and a half.

No one knows. What is paramount is to have a plan.

When oversold, it’s best not to sell. It’s best to have cash and buy when others freak out. Naturally, the process of raising cash is dynamic with markets dictating when to begin and how to deploy.

When overbought, it’s best to sit on your longs and let the boats rise with the tide. Overbought markets are not the time to add stocks. But if you must, look for outliers, the ones with the best fundamentals and strong technical support. They tend to be the most resilient after inevitable market pullbacks.

The market is in a bit of a confusing spot right now. News and fundamentals say, “Stay away.” Technicals and price performance say, “All aboard.” Leadership is both logical and confusing. We are overbought, which would incline one to sell, but it could last a while longer.  The market is giving us a bonus round with which we could potentially rack up huge gains while we wait for a turn. Or it could turn tomorrow.

The market doesn’t have to make sense. We just need to be able to adapt as the environment changes.

Standing on a corner explaining to everyone why it should be sunny today doesn’t shield you from the rain, no matter the logic or facts you put forth. If it rains, you’ll get wet.

The bears got it right for a few days. They will get it right again, but the data says, “Not now.” The data says the buyers are in control and might keep it for a while. The market is due for a pullback, but I won’t know when that day arrives until the data shifts and says the selling has begun to increase.

Now, we must simply adapt. Lockdown forced us to stay at home. Reopening is beginning, whether we agree or not. A lot of energy and time will be spent debating the subject. But the transition is coming. It feels good to have explanations for everything, but we all know it’s impossible to explain everything.

That’s not to say there is no reason. The reason always comes, just not always as soon as we want it to.

“When it is all finished, you will discover it was never random.” – Unknown.

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

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The Year of the Bat

Sector Spotlight by Jason Bodner
Record-Fast Recovery Makes for Restless Bears

View Full Archive
Read Past Issues Here

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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