June 12, 2018

The Boys of Summer are here. And the next time you settle in to watch a major league baseball game, you’ll be prepared by knowing that the average game lasts about three hours. A “60 minute” football game runs on average three hours and 12 minutes. When it comes to playing time (with the ball in motion), however, the average baseball game involves somewhere between 10 and 18 minutes of actual play. The rest is a lot of standing around and spitting. For football, it’s not much different: the average time with the ball in motion is about 11 minutes, less than 6% of the time. That leaves three full hours for standing around and watching the airing of an average 100 commercials during a televised game.

This means that all the action, all the highlight reels, and all the stuff that kids’ dreams are made of happens in a tiny sliver of the actual game. An average 94.2% of a football game is “a whole lotta nada.” To take it a step further, there are three football teams – offense, defense, and special teams – so the all-stars, the best players, play in a stunningly short period of time, about 2%, and most of their plays fail, so the best plays from the best players come about during a stunningly small window of opportunity.

Let me let you in on a little secret. With all the hub-bub of noise that we hear in relation to the thousands of stocks out there, we see the exact same trend in stocks as in baseball or football. A study by Professor Hendrik Bessembinder of Arizona State found that during the 90 years of market performance from 1926 through 2015, only 4% of listed stocks were responsible for the entire overall outperformance of the U.S. stock market. The other 96% collectively matched one-month Treasury bills over their lifetimes.

Only one of 25 stocks (4%) became the monster-winners that provide bragging rights for brokers. As you reach the tip of the tail, just 1% of stocks accounted for 50% of the market gains from 1926 to 2015.

To find the best, investors must focus on a tiny sliver of candidates, so how do we find those best stocks?

The answer to this question has consumed many analysts throughout the years, myself included. Investors all stumble upon their own answers. I have as well. For me, it’s a fairly simple process with complexity added in the form of a massive amount of data. But one of the fundamental base steps in my analysis of stocks comes in looking at the sectors. How are they behaving with each other? Which sectors lead? Which sectors suck wind, and why? How does the best sector compare with the overall market?

Placing a major emphasis on the sectors is like identifying which teams are most likely to make the playoffs. Sure, there are standout players on any team, but ultimately the best players gravitate toward the teams that power forward towards the championships. One individual can have an immeasurable impact. Names like LeBron James, Michael Jordan, Babe Ruth, Wayne Gretzky, Tom Brady, and many others come to mind. When you see a standout player, a team leader, it’s someone you want to get behind.

The Latest Winning “Dynasty” is Information Technology

The same goes for stocks. So what sectors (teams) should we be paying attention to now? As I have been harping on for over a year-and-a-half, Information Technology is the clear winning sector. The growth segments within this sector are coming in Software Services, Internet Retail, and Semiconductors. These three industry groups are powering the sector and pushing much of the market forward. But we have weekly performance changes that we need to monitor should there be a big-picture change.

Let’s take a look at what’s been going on over a few recent time frames:

Last week was a strong one for the overall market. We saw a surge in Telecommunications Services, which is notable because it’s been one of the weaker sectors over the remaining time frames up to a year. Leadership was evident not only in Telecom but also in Consumer Discretionary, Materials, Consumer Staples, Financials, and Health Care. Energy is still facing its recent headwinds after going overbought and correcting. Utilities took a drubbing this week falling more than 3% to be the only negative sector.

Over the last three months, Energy reigned supreme (+12.5%), head-and-shoulders above all other sectors. This is why we saw such leadership in Oil & Gas Exploration companies for the last few months. Recent pressure on crude oil has hurt some of those companies while helping the refiners who profit from the spread between crude and refined product.

Looking back over the past six, nine, and 12 months, however, Infotech and Consumer Discretionary sit firmly atop the first two spots. Not far behind is Energy. These sectors are where we find our leaders.

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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