September 10, 2019

It’s not the information itself, but what you do with the information. As a kid, I got my class schedule and went to class. That’s what I did with that information – I complied. But one summer in the early 1970s, a kid wrote a class-scheduling program of his own for his high school. He “preloaded” himself into an English class with a dozen girls and no other boys. That clever young student was Bill Gates.

Now, the market is giving us a ton of bipolar info. How do we make sense of a market with a personality disorder?

Remember last week, I told you the Big Money Index fell below 45% and that was short-term bearish, but medium- and long-term bullish. It stopped right at that crucial 45% level and now looks to be heading up.

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

With last week’s data, I might be changing my tune to short-term bullish. Here’s why:

September arrived and so has “up-volatility.” Tuesday, September 3rd saw sharply lower stock market index prices. Tariffs started against China. Hurricane Dorian was bearing down on Florida after wrecking the Bahamas. Financial professionals had to come back to the real world and go to work after Labor Day, the official end of summer vacation. In short, everyone was edgy and cranky last Tuesday.

Two days later was a very different story. The broad markets rallied wildly. People ask a lot fewer questions when a market goes up than when it goes down. Either way, here’s the question I always ask: What was going on under the surface? If you want to know what direction the market is really headed, you’ve got to pay attention to the big money. Tuesday’s down day didn’t mean much in that regard.

Here’s what I saw: Out of over 5,500 stocks and over 2,500 ETFs, Tuesday’s down day showed 71 buys and 66 sell signals, meaning that the big money was buying slightly more than selling on an ugly start to September. That buying trend continued the whole four-day holiday-shortened trading week. In fact, this was the first week in five when buying outnumbered selling, and Thursday’s buying was the largest single day in four weeks. That’s bullish. The main thing I noticed when trawling through the Mapsignals data was that Energy selling stopped. That sector had been weighing the market down for weeks. But as shorts started to cover in energy, other weak-fundamental stocks also saw short-covering.

That alone does not inspire confidence for a rally. I don’t like “crap” rallies, meaning only the weak stocks go up. The good news from what my data says is that it’s not only the weak stocks. We saw big money buying in solid growth names this past week as well, most notably in tech.

Looking below, when 25% or more of a sector universe sees buying (or selling) in a week, it goes yellow. For the first week in many, nothing was going on in energy. Tech saw notable buying, with a lot of high-quality stocks being snatched up by big investors. But there was BIG buying in Utilities, Real Estate, and Telecom. These sectors would ordinarily be associated with defensive action, but maybe not this time.

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

This latest move is about rates.

Rates are Crazy Low – and Going Lower

Interest rates are crazy low, and they will likely get lower in the U.S. Rates are already mostly negative in much of the rest of the world. For instance, Denmark released their first negative interest mortgage rate, available for their best borrowers. You could literally earn 0.50% a year from buying a home there.

Big companies are taking advantage by selling long-term bonds. Why? Because they borrow cheap and buy back their own stock. They get better return on their own equity. Buy-backs lift the market. In this low-rate environment, investors seek higher yields – specifically stocks with typically higher dividend yields. For instance, Utilities, Real Estate, and Telecom are rich with higher-yielding stocks.

And as we see investors allocating capital to equities, it’s good for all equities. Remember: owning stocks right now is way better than owning bonds, especially after tax:

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

The S&P 500 dividend yield is even 20% better than the 30-year Treasury yield, after taxes:

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

On the news front, most fundamentals remain bullish. Second-quarter sales and earnings were great, and I expect the upcoming Q3 earnings will be strong as well. Impending China trade talk schedules were confirmed by both parties, but we know by now that this is far from certain. A no-deal Brexit was met with a roadblock with a vote of no-confidence for Boris Johnson. These things won’t necessarily ward off a normally bumpy September, but we usually see a strong rally at year’s-end to bolster the bullish case.

The market is up-and-down, which is normal for the choppy August and September months.

We all have access to the same information. It’s what we do with it that matters. I see bullish days ahead for U.S. stocks. They are strong on their own merits and are a sanctuary compared to the rest of the world.

As far as tolerating the stomach-churning volatility that the market can give us, listen to Fred Jung from the movie Blow: “Sometimes you’re flush and sometimes you’re bust, and when you’re up, it’s never as good as it seems, and when you’re down, you never think you’ll be up again, but life goes on.”

About The Author

Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT

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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