August 28, 2018

Human bias. We are all guilty of it. We approach decisions about outcomes based on our experience. This is normal and “hard-wired” into our brains. The problem comes when we trick ourselves into believing that we know everything. We know winter comes every year. We know that it gets hot in the summer. We know that the sun rises in the east and sets in the west. These are indisputable truths, right?

Well, no actually. What’s winter for us in the Northern Hemisphere is summer for our friends south of the equator. Surf’s up at Christmas down-under. As for sunsets, looking west to catch one is an “earth thing.” If you were Venusian, you would have to look east. Venus spins opposite to most in the solar system. So, to catch a sunset on Venus, you would look east. And a day is longer than a year on Venus. A Venus day is 243 earth days long, while its year is only 224 days long. Keep that in mind next time you visit Venus.

I know what you’re going to say: “None of this is relevant to me.” That may be true, unless of course you have relatives in Australia – or even Venus, for that matter. The point is, we humans are pre-programmed for our local bias. It allows us to slip into the comfort of a routine, which we crave on an instinctual level. This means when change rips through the system, or the system is not predictable, we get uncomfortable.

The market is a place where everybody wants to see some sweet and soothing predictability. When it’s calm, investors consistently get lulled into quiet relaxation, with an innate assumption that the market will float along higher forever. That assumption is both true and not true. Markets have been steadily climbing since the early 1900s, but that ancient timeline is just too long to be comfortable for most of us. Year by year, the market can rise or fall very sharply, as we have seen several times over the last few decades.

The average investor also develops situational bias. For example, when the general market indexes surge higher, a general feeling develops that “the markets are good,” but when markets come under pressure, people generally seek out the guilty sector that is causing it – like tech stocks in 2000 or housing and financials in the 2008 mess. My point is that it pays to know the environment beyond your comfort level.

Markets are strong now, but why are they strong? What is powering them higher? And what can drag them back? The most important question you should ask yourself each day is: Where is the leadership? If you’re not constantly asking this question, you run the risk of tricking yourself into a false comfort.

This is why I look at the S&P’s 11 sectors for you here each week.

Late Summer “Churning” in the S&P Sectors Continues

The S&P 500 posted a reasonably strong week, with a +0.86% close for the week, but the sectors are still sloshing around, meaning one week the leaders lead and the next week they lag. This is typical in summer and not something I am overly concerned about. But we should be aware of it. Let’s look a little deeper:

The leading sectors of a couple of weeks back are this week’s losers: Real Estate, Telecom, Utilities, and Consumer Staples. These are typically more “defensive” sectors. They get bought up when uncertainty rises. Investors like to buy stocks with high yields (safer and more predictable dividends) like Utilities, Telcos, and Real Estate, with known outcomes like Consumer Staples. (Everyone will still buy toothpaste and toilet paper, even if things get ugly.) These were leading sectors for a week or so and now they lag.

The top three sectors last week were Energy, Consumer Discretionary, and Information Technology. This has me giddy for a few reasons. Let’s leave energy aside for a moment, since this is a commodity that is usually seasonally-driven. Consumer Discretionary and Info-tech are growth-oriented sectors. These sectors perform well when there is perception of smooth sailing and calmer markets. These sectors are the six-month winners, as you can see below. But for the past few weeks and months, these sectors have been bouncing around as money moves from one to the other, in search of “alpha” (return above the indexes).

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

This says one important thing to me: Stocks with strong fundamentals are getting rewarded again. This sets up well for the fall. When volume picks up as traders return from their vacations, we want to be in the fundamentally strong sectors that should lead the market higher. Infotech, Consumer Discretionary, and Health Care is where we want to see leadership, now that earnings season is over. When these sectors sport growing sales and earnings, they tend to signal a strong economy, and that is an encouraging sign.

Last week, the financial media made a big deal out of the “longest bull market ever” (depending on how you measure it), but I feel this bull market has a lot of room left to run. There will be stories and headlines to rock the boat for sure, but all in all, the backdrop seems to be a great prognosis for strong market performance in the coming months, and possibly years. We have record low corporate tax rates, record high sales and earnings growth, corporate buy-backs, and a record high stock market. Take that, bears!

If you are going to be bullish or bearish, do so based on facts and data. Try not to develop environmental bias, just because it feels good. Remember, there is a southern hemisphere with a warm Christmas. And don’t put too much of your credence in the media. It’s entertaining, no doubt, but its main purpose is just that – to entertain enough viewers to sell ads. Jerry Seinfeld had a point when he said: “It’s amazing that the amount of news that happens in the world every day always just exactly fits the newspaper.”

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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