July 3, 2018

Earthquakes are associated with massive destruction and chaos. The word itself conjures images of flattened buildings and major damage. The common conception is that they are rare. The fact is, only the destructive ones are rare. An earthquake greater than 8 on the Richter scale happens maybe once a year, but quakes with a magnitude of 2 or lower happen hundreds of times a day, but most aren’t noticeable.

Just as in the stock market, we don’t (or shouldn’t) pay any attention to the small tremors. There are many down days and many up days. We only pay serious attention to the REALLY BIG down days.

The stock market has been very strong in recent weeks. We have seen a wave of heavy institutional buying concentrated in Information Technology, Consumer Discretionary, and Real Estate sectors. I interpret these as very bullish for the overall market. As money flows into growth-heavy and discretionary spending sectors, the strong economic implications are obvious. And as investors plow cash into yield-intensive sectors like REITs, it signals a dovish view for the near future of interest rate policy. In short, the market action is supportive of a continued bull market in U.S. equities.

Despite all this as the backdrop, it seems investors were looking for an excuse to take some profits. The stage was set perfectly for this past week to be the time. We are at the start of summer, between earnings cycles. Liquidity is typically lower, and minds are generally focused on vacations, lazy summer days and the upcoming July 4th mid-week holiday. The market was nearing overbought territory heading into last week. All it took was some trade war rhetoric heating up over the weekend to usher in a sloppy Monday.

Monday’s market action was typical for a defensive rotation. By this, I mean growth-heavy sectors got punished while defensive sectors got rewarded. Consumer Discretionary, Energy, Tech, Financial, and Materials stocks all sagged. Utilities and Consumer Staples saw an influx of cash. Tuesday’s short-lived rebound gave way to some more weakness on Wednesday. The end of the week saw the market firm up. The talk of tariffs and trade wars make for great TV. We have pundits and news people whose job it is to keep eyeballs glued to the TV or screen. Once there is traction for a story, gas gets thrown on the fire.

The Ups and Downs of the Trade War Story

I believe we are seeing continued evidence of the prominence of algorithmic trading. If you can step back, you can watch this drama unfold. When stories come out in concert through multiple media outlets, all one has to do is look at the stock prices to see if the stories cause concern or not. Earlier this year we saw the market’s disapproval of the news about trade war fears. Once the market caught its footing again, however, growth was back in favor and the broad market indexes were back on track for new highs.

What is interesting is that the news outlets kept trying to fuel the trade war story for weeks. The market kept shrugging it off and vaulting higher. If you paid attention, you could often see an initially negative reaction vaporize and reverse to positive trading. This happens because computer-driven algorithmic trading systems are focused on headlines, so we can see the action unfold. As negative news hits, these traders “test” to see the depth and liquidity of the market by shorting shares. If their offers for sale are met quickly with firm bids, there will be quick bids to cover, and sell orders covert to become net buyers for the day. The “test” failed, and small losses are taken to give way to long stock trading, looking to generate small profits to offset any losses. These types of days are not big money makers for the algorithmic firms.

Contrast this to when short sell orders are harder to fill on bad news days. Weak bids mean insufficient liquidity to absorb sell orders. Algo firms can get more aggressive and fade any bids to cover any they may have entered. Sell orders accelerate with more volume. If the market begins to free-fall, we know the algo guys are making serious money. In fact, in a conversation I had with a trader, he said “we can make our year in days like these.”  In short, algo traders wait for particularly soft markets so they can sell the stuffing out of it. For them, a few standout bloody days in the stock market can create standout years.

I think we saw a mild version of that last Monday. In summer, market liquidity is generally lower and there are fewer positive catalysts, like earnings, to bolster stocks. The right negative story came along, and bids softened. Shorting began, which propagated selling, but these were all traders. I bet that most everyday investors were not out emptying their stock portfolios at the crack of dawn on Monday morning.

Why am I telling you all this? Because the summer months are prime times for short-term traders to try to move markets based on liquidity factors like those discussed above. But the underlying theme hasn’t changed. The environment is bright for U.S. businesses. The economy is strong. Consumers have more disposable money to spend, and growth is evident in past consecutive earnings reports. Company guidance is strong, and any market pressure has been overwhelmingly positive for the past 18+ months.

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

This is why market dips – like these short-lived ones we saw last week – should be viewed as buying opportunities. Until the fundamental undercurrent changes significantly, the data is bullish for U.S. stocks. This can be seen easily in the strongest sectors for the last 3 and 6 months. Consumer Discretionary, Information Technology, and Energy are sectors attracting investment capital. This is the hallmark of a strong bull market. This did not change on Monday. Nor do I envisage it changing anytime soon.

“Ask yourself the question, ‘Will this matter a year from now?’”

– Richard Carlson, author of “Don’t Sweat the Small Stuff.”

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*


Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives