August 21, 2018

We’ve all heard that “perception is reality.” We all know this in theory, but perceptions may not always seem so “real” when presented with the facts. Let me explain. I think everyone can generally agree that Health Care in the U.S. is not without its major flaws. The insurance situation affects just about everyone in America (unless you’re in Congress). The costs seem astronomical for limited coverage with seemingly endless payments due. The situation is so out of control that most people have just come to accept it.

Consider that hospitals in the U.S. charge up to $800 for an IV bag of sterile saltwater. The average price of manufacture is $1. An 800-fold (7,900%) markup on a sterile version of what covers 70% of the planet seems ludicrous. Yet, I don’t think hospitals would react well to a BYOB (Bring Your Own Saline Bag) program. If you’re lying in a hospital bed getting much needed hydration, the price seems unimportant.

It’s ultimately the perception of value that drives our decision making. If you need saline to live, $800 or not, most of us will be fine with seeing that itemized on the hospital bill. In fact, we often think something is better if it costs more. Ponder this study on placebos. Patients found that a $1,500 placebo was far more effective than a $100 one. Of course, they did not know that they were given placebos, but they did know the price of the pill. Each pill was the same formula, but they thought the expensive pill worked better.

We perceive more expensive things to be better, be it cars, houses, food, clothes, or vacations. So why not stocks? Don’t most people want to buy cheap stocks? Someone might be eyeing a $100,000 car when a $35,000 car would do the same job, but that same person is looking at the $20 stock that has cratered 40% this year, thinking the $100 stock that’s up 40% is way too expensive! It’s funny how the mind works…

I believe in trends and looking for things trending higher.  Expensive stocks tend to get more expensive, while cheap stocks tend to get cheaper. Looking at sectors leading and lagging the market is no different. It’s human nature to want to buy the one that’s down. But when shopping, we pay for “higher quality.”

I remember when Facebook (FB) debuted at $36.53 on May 23, 2012. The market thought it was “too expensive” and it plummeted -16.53% by end of day. By August 27th it closed at $18.06, down over 50% from its IPO price and there was rampant talk about what a calamity it was. But even then, I recall talk of how it was still overvalued. FB then began to steadily climb, getting more “expensive” along the way.

I suppose some might have rejoiced in the recent disappointing earnings release which caused FB to drop roughly 20% from nearly $210 to the low $170s. But, I’d like to point out to those who thought it was too expensive even a few weeks ago, FB is still up more than 470% from its IPO price. That works out to almost 78% per year. And I guarantee, all the while, people said it was too expensive to buy…

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

Whether or not I believe Facebook is a good investment or not isn’t the point here.  It’s that in the stock market, investors love to catch falling knives – er, I mean “good deals” – but when it comes to leaders that keep leading, they shy away.  This same psychology is what causes sectors to push higher or lower.

(Navellier & Associates does not own a position in Facebook for managed accounts Jason Bodner does not personally own a position in Facebbok.)

Weekly Winners Vary, But Long-Term Winners are Consistent

Now, we are in the dead of summer. Volatility is usually higher; earnings season is almost over, and many professional traders are on vacation. We can see that the sector trends lately have been inconsistent with the longer-term picture. Last week was a defensive week. Leadership was in Telecom, Staples, Real Estate, and Utilities. In fact, it has been that way, off and on, for the last three months. Yet when we look longer term, Info Tech, Consumer Discretionary, Health Care, and Energy are still the 12-month winners.

I am going to focus on Tech and Discretionary for a moment.  The economic backdrop is really strong for the U.S.  The trade war rhetoric, as I have mentioned, is overblown and a way to keep viewers glued to the financial media. We have record sales, record earnings, record sales growth, record low corporate tax rates, record buy-backs, and a record high stock market. In my opinion, that’s not a market to bet against.

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

When the fall rolls around, I believe we will see resumed leadership in prior winners: Tech, Discretionary, and Health Care (despite the $800 saline bags) should see a resurgence in strength after a much-needed summer vacation. Energy has been squashed over 6% this month so far, in a time that usually is strong for energy. Summertime usually brings about big energy requirements for cooling needs and long car trips. The 1-year chart of Crude Oil still says uptrend, so I’d eye Energy for a possible resurgence as well.

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

Here’s the thing, though: When I look at the stock market, I typically don’t go “bargain hunting.” I look for the best – the leaders. They typically continue to push higher and drag entire sectors along with them. Remember that the next time you are deciding between premium gas or regular. Looking for investments, you may be drawn to the cheaper one, but in most cases it should be the other way around.

Warren Buffett, in his infinite wisdom, said, “Price is what you pay, value is what you get.”

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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