May 8, 2018

Volatility. We’ve heard that word a lot lately. The markets have certainly been on a wild ride since late January. We often see intraday reversals from negative to positive and vice versa. It’s hard to know when we see signs of a market promising to run higher. At the first sign of positive performance, it seems like stocks get rocked by more volatility. So how do we know when there are signs of life returning?

Sometimes, things look hopeless… but hope remains. Consider the case of Fabrice Muamba, who played professional soccer for the Bolton Hotspurs. In 2012, during a match with Tottenham, Muamba collapsed with cardiac arrest on the field. His heart stopped completely; it did not beat for 78 full minutes. He was clinically dead for over an hour. Imagine coming to life from certain death. His heart began to beat, and he awoke to life. He eventually regained full cardiac function and went on to make a full recovery.

I liked Friday because there were some signs of life. After the market rocketed higher on Friday, I noticed something interesting on Saturday morning. When I look at unusual institutional activity, I don’t only look at buying. I look at selling, too. After the market peaked on January 26, the selling signals accelerated on February 2. Since then, we have seen two sell signals for every one buy signal. Our historical average is two buys to one sell. What I noticed was that the number of sell signals on Friday was the lowest it’s been since April 18th which was also the market peak for the last 31 trading days.

This is significant because it marks a change from the selling we have seen the last few weeks. Are these signs of life?  That will only become apparent with more time, but it’s noteworthy for now.

Information Technology Returns to the Lead Last Week

Before we get too excited, let’s take a look at the sectors leading and lagging the charts last week.

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

Looking at the sector performance for the week, we see Information Technology, Energy, Materials, and Real Estate as the top four (and only positive) sectors for the week. Tech was a clear winner whose return to glory is curious. The tech sector has been under fire lately for fear of “peak earnings momentum,” amongst other worries. With some screaming earnings reports and recovery from profit-taking, it seems that “FAANG fever” is alive and well. Signs of life – just as the media was ready to “de-fang” the tech sector – are significant because in my research I saw heavy institutional accumulation in the tech sector.

Real Estate’s positive performance is also striking because the sector typically attracts buying in anticipation of static or lower rates. The sector has some defensive characteristics, but as yields are relatively higher than in other sectors, it becomes attractive as attitudes towards rates become less hawkish. We also saw signs of heavy institutional accumulation in Real Estate this past week.

Materials, while eking out a positive performance, saw hardly any signs of institutional buying last week. Rounding out the top four, Energy continued to show buying power. We first observed institutional buying in Energy in mid-April. Since that time XLE (no position) has rallied more than 9.6%. This is a trend we continue to have our eye on. The buying in these sectors (minus Materials) also correlates to heavy unusual institutional buying. By unusual, I mean buying that is above average volume –outside the normal volatility range and irregular in its price behavior, according to my firm’s metrics.

On the tail end, Consumer Staples, Health Care, and Telecom saw poor performance last week. (Telecom has a small number of constituents so it should be treated accordingly.) Areas with unusual selling were Consumer Staples, Consumer Discretionary, Health Care, Financials, and Industrials.

Are these metrics showing us signs of life? Are we out of the woods yet? It’s too early for me to say, but I like to see a meaningful shift in the data followed by a validation. We have seen the beginnings of a shift; now, we need to see a confirmation. I’ll be watching sector activity closely to see market approval.

Fabrice Muamba’s heart stopped for over an hour. He literally came back from the dead to resume life as a husband and a father. Earlier this year, the market had a form of cardiac arrest. It ran into a wall in late January and has been struggling to find its footing ever since. Is Friday the sign of life we have been waiting for or do we need to see more flushing of the system? Buddha may have held the answer when he said: “Do not dwell in the past, do not dream of the future, concentrate the mind on the present moment.”

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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