September 11, 2018

It shouldn’t surprise you that worry is everywhere. Anxiety disorders are the most common mental illness in the United States. According to the Anxiety and Depression Association of America (ADAA), 40 million Americans over the age of 18 are affected by anxiety — roughly 18% of the nation’s population.

Last week was a worry week. The stock market showed this clearly in the price action. The S&P 500 fell every day, totaling -1.03%. All sorts of headlines ripped through the landscape covering all sorts of topics. There were Senate hearings implying possible regulations for tech companies, a new book painting President Trump in a negative light, an op-ed piece also painting Trump in a negative light, and several other wild leaks. There was even an “Elon Musk Smokes Pot” interview. The truth is, the media loves to test negative headlines to see where they can get traction. Last week they scored big, and markets reacted.

On top of all the news headlines, I saw an old favorite phrase, “Tech-Wreck,” pop up several times last week, since the Information Technology index fell nearly -3% last week. Energy shed -2.3%, Real Estate lost -1.23%, and Consumer Discretionary fell -1.22%. The selling started with tech stocks being punished for fear of possible regulation. Talk of Attorney General Jeff Sessions eyeing tech companies and Senate hearings were enough to trigger a slide. This quickly rippled into related growth stocks and sectors.

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

This is yet another example of algorithms kicking in. When bad news hits, many times the market shrugs it off and keeps on chugging higher, but the bad news headlines never stop coming and occasionally they cause a reluctance to keep buying stocks. When algorithmic traders see this, they sell stocks aggressively.

The moves down can be sharp and disconcerting, but this has become a normal occurrence. It’s a new-fangled type of periodic correction. Some stocks were moving 2-3 times their normal daily ranges. This can only be explained by a lack of liquidity on the bid-side, as sellers come in aggressively.

Days like these are profitable for high-frequency-trading firms. They like market setups like this. They love days when the whole market is weak. I remember talking to one HFT trader who said days where the major indices crack and lose 2%-to-3% or more are the days these traders make enough money for the whole year. Keep that in mind when you see what seems like an overreaction to negative news headlines.

When we can explain and ignore jittery short-term moves and look out over a few months, we can see broader trends. I was surprised to see Utilities was our three-month winner with an +11% spike. The top six sectors were Utilities, Health Care, Consumer Staples, Consumer Discretionary, Real Estate, and Telecom. Setting aside Discretionary and Health Care, we get a very defensive-looking three months.

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

When we look at the last nine months, however, we see the engines of growth up top, front and center. Consumer Discretionary, Info-tech, and Health Care were the top three performing sectors, by a wide margin. They each notched more than 10% gains, with Consumers and Tech up 17% to 19%. These are the growth-heavy sectors that I love to see leading the market.

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

Get Prepared Now for a Strong Fourth Quarter

So, what gives? Why are the weak sectors leading and the strong sectors just hanging out? My opinion is that trade war fears, regulation jitters, and White House drama are distracting investors. I believe it’s quite possible that in the coming month or two we will see a big lift in stocks. We have quarter-end “window-dressing” and ETF rebalances coming, which typically benefit stocks. I think Trump will pull a rabbit out of the hat and soothe the trade-war indigestion with a magic remedy. This will come just in time for mid-term elections in November. And I suspect mid-October earnings will kick off yet another stellar season.

These things, coupled with a strong economic backdrop, bode quite well for a strong end-of-year finish, so it is important not to give in to anxiety when there are occasional wild swings in stock prices. I believe the new norm is periodic days of excessive volatility. The never-ending growth of algorithmic traders keeps contributing to volatility. Let’s be honest: How many normal people wake up on a Wednesday and decide to sell all their technology stocks? Very few, if any. So, if you and I aren’t doing it, who is? The machines are, and their presence is only growing. This past week’s turbulence was hardly a big move. It was merely an air-pocket. When big moves come, I expect them to be deeper, wider, and less comfortable than in prior years. We long ago entered the machine age in markets; we better get used to it.

The famed golfer Walter Hagen once said, “You’re only here for a short visit. Don’t hurry, don’t worry. And be sure to smell the flowers along the way.” So, when market worries well up, the best thing to do is ask yourself, “What’s the big economic picture for U.S. stocks?” My answer: It’s pretty fantastic. “What is the tax situation for U.S. business?” Pretty fantastic. “How are U.S. company earnings?” Never better. “What sectors are leading the longer-term trends?” The growth-heavy ones: Tech, Discretionary, and Health. As the answers pile up, you should be asking yourself one final question: “Why am I worried?”

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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