September 3, 2019

Markets and individual stocks need to take breathers every now and then. When I think of great stocks, they often pause and gather strength before spring-boarding higher. Sometimes the lags are brief. Other times they are longer. The Earth itself had a similar lag period in its own evolution. Activity stalled for about a billion years, a period that scientists dubbed “the boring billion.” During that Big Yawn, the Earth became a slimy, near-static world of algae and microbes. Then boom! Evolution exploded and flourished.

I think we are in such a breather for the U.S. stock market.

August has lived up to my expectations of a bumpy, unpredictable ride. Bad and good news seem to come from nowhere and the trajectory of the market is hard to see in the immediate term.

This is a lot like what I am seeing with this unprecedented storm headed my way.

Hurricane Dorian is bearing down and coming uncomfortably close to where I live.

Uncertainty and volatility can never be removed from life, nor can it be removed from markets, so the best we can hope for is to make sense from it and try to adjust for when some predictability returns; so as we bid farewell to a volatile August and welcome a potentially volatile September, where do we stand?

Last Week’s Rally Was a Low-Volume Head-Fake

First off, the major onslaught of selling has slowed down into a light volume going into the Labor Day holiday weekend. The good news is that the market has been rallying. The bad news is that it’s been rallying on very low volume. That means that the recent rally should be treated as suspect – a head-fake.

The low-volume week just past brought us low signal counts. The distribution of buying and selling was in favor of selling, while Utilities and Staples saw a spike in their buying. This is still defensive action.

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

The other thing to make note of is that the MAP Big Money Index keeps falling. That’s a ratio of buying to selling. When buying dries up and selling picks up, that index falls. When it falls below 45%, we typically see lower market prices ahead. That spells “caution.”  That’s the bad news: We may be in for more bumps and discomfort. The good news, though, is that when we see a drop below 45%, it typically means we are close to the end of selling. It’s like the seventh inning in baseball: the game is nearly over, but there’s a lot of game left to play, with some decisive end-game strategies to be worked out.

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

But here’s the thing: Great stocks go up over time. It’s an observable fact. The trick is to find the best stocks that big money is pouring into. Zero in on those and get positioned. When they “go on sale,” that is a great time to pounce. But fear often gets in our way. We fear “it could go lower,” or “I could lose money.” No one likes to lose money or feel in danger. But losing is a part of winning. There are countless stories of failure preceding greatness. Athletes, playwrights, composers, creators, politicians, and any other walk of life is dominated by stories of failure preceding great success.

Michael Jordan said, “I have failed time and time again, and that is why I succeed.” Colin Powell said, “There are no secrets to success. It is the result of preparation, hard work, and learning from failure.” Steve Jobs said, “If you are not willing to fail, you are not going to get very far.”

As the market bobs and weaves, we need to focus on the data. Earnings reports were very good for the second quarter. Interest rates are low and likely going lower. Europe has political headwinds, causing capital flight out of equities there. Latin America is rife with major issues. China is reporting a slowing economy. Amid all this doom and gloom, the United States remains the bright spot. We are the safe haven in a world of uncertainty. And as the dividend yield of the S&P 500 is now more than the 30-year bond before taxes, the after-tax treatment makes owning stocks far more compelling.

This means that if we see a market dip, you should have your shopping list ready. When you’ve had your eye on a coat, or a car, or a computer, and there’s a price slash, you wouldn’t hesitate to dive in and seize the opportunity. But when stocks go on sale, people question why, or how much lower can it go?

I suggest you research your stock wish-list and get it honed and ready. The market is providing you with entry points and will continue to provide opportunities to take advantage. Our data suggests one is lining up, and should it come, it’s a great chance to grab some stocks. Should it not come, then logic is starting to prevail, and investors are starting to realize there is no better place to put your money than U.S. stocks.

So, as I hunker down and prepare to ride out whatever Hurricane Dorian delivers, I am also thinking about when hurricanes rip through markets. In the past, each correction has invariably proven to be a great buying opportunity. It almost makes you want to see some red ink…

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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