September 18, 2018

Change.

It’s all around us. But our human instinct is to crave structure, order, equality, and predictability. We become accustomed to the status quo and expect it to continue, even after a tumultuous change. Think about some recent examples. In the 1940s, there was life before the war and after the war. In the 1950s, there was life before the Polio vaccine and after. In the 1960s, there was life before the Beatles and after. Yet once the “after” rolls around, everything seems like that’s the way it always was.

As September is peak hurricane season, Florence is fresh in our minds, so let’s use hurricanes as an example. Hurricanes have all sorts of names, like Wilma, Hugo, Andrew, and Irma. But prior to 1979, hurricanes were only given women’s names, much like the tradition of ships and cars having a female name. But feminists protested over the implication that only women were turbulent and volatile. So that year storms started being named after both sexes. “Bob” earned the dubious distinction of being our first male hurricane. But now, we don’t even think about it, and routinely expect either a male or female name.

When everyone believes something, nature has a funny way of making that the precise moment when change comes. The same thing happens in markets. A great example is the strength of a given sector. Information Technology has been a leading sector for so long now that it’s almost expected that Tech will continue to lead. The question is: Will it? My answer may surprise you…

The Information Technology sector is not a current leading sector. I define a leading sector as a leader in one of the top three spots over a recent time frame, but infotech flunks out over the last six months.

Infotech was not a leader this past week. Telecom, Industrials, and Energy nabbed the top three spots, just barely nudging out Infotech in fourth place. While Telecom is the smallest sector in terms of constituents, it’s still # 1 this week. Financials was the only negative sector for the past week’s price action.

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

Looking back three months, we see Health Care, Utilities, and Telecom as the top three performers. Infotech came in eighth in terms of three-month performance.

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

Once we start looking at six-month performance, we begin to see some stronger bullish indications. Consumer Discretionary, Energy, and Health Care were the top three sectors. Infotech came in a not-so-distant fourth place, but again was not in the top three.

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

It’s only when we look back nine and 12 months that we see the top sectors are the growth engines for a bull market. Consumer Discretionary, Information Technology, Health Care, Energy, and Financials are all there, with consumers and tech taking the top two spots.

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

It’s fine to sit and Monday-morning-quarterback here, but what does this survey really mean?

Technology Still Holds the Key to Mankind’s Future

Information Technology was the single strongest sector by a mile for nearly 18 months after President Trump won the 2016 election. We saw all sectors surge but none quite as strong as tech. Recently, Infotech has fallen back in the pack. Should we worry?

I think tech is the single most important sector to watch as a clue for an outlook on the overall market. This is because tech is the key bellwether for growth. One could argue that it always has been. Railroads were undoubtedly industrial stocks, but in the time of their infancy, they were the kings of technology. The same could be said for airlines and aerospace stocks 50 to 60 years ago. They eventually became industrials, but in the fifties was there any higher tech than planes and spaceships? Telecom is a defensive sector now, but decades ago, it was the key sector for growth. Yes, there was a time many can remember where a telephone was a luxury and not a necessity.

The point here is that technology holds the key to the future progress of mankind. It would be downright difficult to argue that our future will not be shaped by new emerging technologies. We will be in the Information Age for an unlimited (and unknown) period of time. How long? Only time will tell.

That’s why Infotech is such a key component, in my view. The sector’s leadership from the election forward turned this past summer into a period of rest. Infotech is “taking a break,” in my opinion. The “tech-wreck” story that CNBC loves to transmit is a natural thing. Like any bull market, there will be periods of correction and consolidation, but the engines for growth still live in tech stocks, and I believe they will resume their march higher soon. Of course, you will want to ask me, how “soon” is soon?

Market pundits are currently engaged in lots of debate over how much longer this bull market can go on. It is my opinion that we still have much fuel in the tank and the right conditions to see higher prices. At the risk of sounding like a broken record, we have record low taxes, near record low rates, record sales and earnings, record cash repatriation, record buy-backs, and P/Es that are not at feverish levels yet.

I think this fall will bring resumed vigor for tech stocks and a higher overall market. No one knows for sure, but I believe the data points to a tech resurgence. Salesforce.com’s founder Marc Benioff said, “The only constant in the technology industry is change.” How true. The tech sector is just a part of the whole market. The whole is a microcosm for life as we know it. And in life, the only constant is change.

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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