August 13, 2019

Remember what a “slow news day” looked like? Hard to believe, but on April 18, 1930, the BBC reported, “There is no news today.” Then they just played piano music for 15 minutes.

Not these days. There are endless stories, scandals, emergencies, tragedies, and debates. Many take off work in August, so August slows down at work. Then why shouldn’t the markets also be quieter?

Actually, low volume often brings high volatility. This week I spoke with traders, researchers, publishers, and money managers. I had a lot of conversations about the markets. The picture that emerged is this:

Despite the ugly price action, U.S. stocks are still the best place to be.

Let’s go over why this is true, and what happened last week.

First, what happened: Initial selling dropped the S&P 500 -2.98% (-767 Dow points) on Monday, capping a sloppy 5-straight down-day streak. Monday saw 18:1 big money sells vs. buys. That’s huge. Tuesday looked like a relief rally, but under the surface, we saw 4:1 sells vs. buys, so the selling wasn’t over. Wednesday’s positive price action still saw 2:1 sells vs. buys. But Thursday (+371 Dow points) showed buyers were back, and the selling was likely over – for now. Big buyers outnumbered sellers 5:1. Finally, on Friday, things looked evenly balanced, with volumes calming down significantly.

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

When the dust settled, one thing was clear: investors wanted out of energy. If you look at the table below, the Mapsignals data show in which sectors buying and selling was concentrated. Unsurprisingly, traders bought Real Estate for higher yields as rates head lower. The 10-year yield fell to nearly 1.61% intraday on Wednesday. More on that in a moment, but look at the yellow numbers on the right: Ten out of 11 sectors got sold heavily – that is more than 25% of the universe logging big money sell signals. But one sector jumps out – energy, with 131 sell signals last week on a sector of 87 tradable stocks. That’s huge.

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

This explains part of why financials got whacked. As energy stocks (specifically Oil & Gas) feel the pinch, their profitability comes into question. If they start going bust and are levered with debt, lenders (Financials) will be on the hook. We saw a similar scenario play out in August of 2014: Oil prices tumbled, leading to massive pressure on Oil & Gas stocks, which in turn pressured Financials.

As rates collapse, that also pressures financial stocks. Lenders make money on interest. If rates drop, margins shrink. And rates are in a global crunch. Fully 19 major countries currently have negative yields somewhere on their bond-yield curve, and only one of them is outside the E.U., and that is Japan.

Remember when I blamed the high-frequency traders and algo-traders when any market storms whipped up in the past? They can amplify volatility with low liquidity. August is their time to create and profit from perfect storms. Traders go on vacation, creating lower volume. Cue the HF-traders to test shorting stocks on bad-news days. When tariffs get announced, watch out below!

You can see it in earnings volatility. It would be interesting to compare Q2 earnings volatility to the rest of the year. I am watching unusual downside moves when a company misses expectations or guides lower. I believe it’s another case of the mice playing while the cats are off to the Hamptons.

And if you’re looking for news as a market guide, be careful. Last week, China announced that it would halt buying U.S. agricultural products, and the media played up the peril to U.S. farmers. As Louis Navellier pointed out to me (see his column, below), the market didn’t buy it. China is the largest consumer of soybean products, and how did soybean futures respond? They rallied +3%!

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

I’m still bullish on stocks. Why?

First, there’s earnings. For Q2 2019, 90% of S&P 500 stocks have reported results and 75% beat earnings – that’s above the 5-year average. Among sectors, 97% of Health Care companies beat earnings. Ironically the Energy sector has the biggest aggregate earnings surprise. 57% of the S&P 500 beat sales.

The blended earnings decline is -0.7%. That may sound bad but don’t forget that earnings grew at a monstrous rate after the Trump tax cuts. Companies felt an immediate impact to their bottom lines. So, seeing a small trail-off was expected. In fact, I’d argue that the lack of a larger slide is a sign of strength.

FactSet said that more than 40% of companies cited tariffs on their earnings calls in Q2 vs. Q1, led by Industrials. While that may seem bad, it’s still well below the same time a year ago – 23% lower. So, tariffs are less concerning now to corporate America than they were last year. Indeed, “tariff” mentions dropped for three straight quarters through Q2 2019, even though tariff concerns may creep back in Q3.

So, sales and earnings are strong while interest rates are very weak. Again, you earn 43% more money in your pocket collecting dividends holding the S&P 500 than you do earning interest on government bonds.

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

Navigating markets can be like a high wire walk: Stay focused, don’t get sidetracked. Nik Wallenda has 11 world records on the high wire. He said: “I’ve trained all my life not to be distracted by distractions.”

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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