After a Strong March Surge

After a Strong March Surge, What Does April Hold?

by Louis Navellier

April 5, 2016

*All content in the Marketmail Introduction is the opinion of Louis Navellier of Navellier & Associates, Inc.*

Earth ImageThe S&P rose 1.8% last week and 6.6% in March.  Dividend growth stocks continued to drive the market higher.  They were especially strong after Treasury yields declined in the wake of Fed Chairman Janet Yellen’s speech to the Economic Club of New York on Tuesday in which she reiterated her dovish stance that the Fed should proceed cautiously in light of fears about domestic as well as global economic growth.

The fact that Yellen cited global risks means that the Fed is watching more than just the labor market and inflation, which is its Congressional mandate.  Yellen also said that the Fed would gradually raise key interest rates as inflation materializes; but she also made it clear that the recent pickup in inflation may not persist, so the Fed must proceed cautiously.  So, despite some members of the Federal Open Market Committee (FOMC) calling for higher interest rates, Yellen made it clear that she wanted to proceed with caution; so I would not expect to see any interest rate increases at the next (late April) FOMC meeting.

Ed Yardeni is a widely respected economist that I follow. In his morning briefing last Wednesday, Yardeni said that he now expects no rate increase in 2016 or at the most only a “one and done” interest rate increase in 2016.  As I have repeatedly said, the Fed does not like to raise rates in a Presidential election year, since it likes to stay out of the political debate, especially now that the strength of the U.S. economy is a major issue with so many frustrated voters.

Speaking of slow growth, the Atlanta Fed announced on Friday that it now expects only 0.7% annual GDP growth in the first quarter.  Last Monday, they also forecast that consumer spending will grow at only a 1.8% annual pace in the first quarter, down from its previous estimate of 2.5%.  Additionally, a wider trade deficit is now expected to reduce first-quarter GDP growth by -0.52% vs. its previous -0.26% forecast.  This revision may somewhat explain Fed Chairman Janet Yellen’s dovish comments.

In This Issue

For most of the first quarter, the price of oil and stocks seemed joined at the hip.  In Income Mail, Bryan Perry examines the bullish implications of the recent uncoupling of oil and stocks.  In Growth Mail, Gary Alexander turns his historic focus to the rise of global trade since April of 1966, a month in which three new products made modern trade much faster and cheaper.  In Global Mail, Ivan Martchev looks at the oil/stock split and the sometimes-conflicting signals between interest rates and currency values, while Jason Bodner covers the principles of momentum investing by looking to the heavens on a starry night.  I’ll conclude with a look at what April and the rest of the year might look like, based on recent history.

Income Mail:
Taking the Sheen off the Oil Rally
by Bryan Perry
A Bullish Uncoupling of the Stocks to Oil

Growth Mail:
50 Years of Global Trade Growth Now Threatened
by Gary Alexander
Four Widespread Myths about Trade

Global Mail:
Why Treasuries Are Rallying
by Ivan Martchev
Mind the Yen

Sector Spotlight:
Momentum Trading in Markets and Life
by Jason Bodner
Shifting Momentum among the Sectors

A Look Ahead:
April is the Best Market Month
by Louis Navellier
What Happens After a “V” Shaped Quarter?

Income Mail:

*All content in "Income Mail" is the opinion of Navellier & Associates and Bryan Perry*

Taking the Sheen off the Oil Rally

by Bryan Perry

From the latest headlines within the energy sector, there is a well-defined resistance level for WTI crude oil at $40 per barrel. Last week, data from the U.S. government's Energy Information Administration showed that U.S. crude stockpiles rose by 2.3 million barrels to 534.8 million barrels, the seventh week at record highs. The recent price recovery was muted as the market's focus switched back to signs of growing oil stocks. The front-month contract for U.S. crude futures has dropped to $37.57, the lowest since March 16.

High global oil inventories put the sustainability of the gains in question, despite an 11-year high in seasonal refinery utilization. There's a backlog of oversupply that needs to be worked out of the system. Crude prices have risen about 50% since mid-February on optimism over signs of falling U.S. output and a proposal by several major oil-exporting countries to freeze production. I’ve been cautioning all the while that a pact on a production freeze is akin to bank robbers agreeing not to rob the same bank. Saudi Arabia will freeze its oil output, but only if Iran and other major producers follow suit, according to Saudi Deputy Crown Prince Mohammed bin Salman in a Bloomberg interview last week.

OPEC crude output rose slightly in March to 32.47 million barrels per day (bpd) from 32.37 million bpd in February, according to a Reuters survey, while Iran is expected to add another half a million bpd of oil within a year. The good news is that the recent rally has allowed U.S. producers to hedge their production at higher prices, which could keep more of them from shutting down.

Elsewhere, the slide in the U.S. dollar following Janet Yellen’s dovish speech last Tuesday came to an abrupt halt, reversing higher last Friday after headlines of better-than-expected U.S. jobs and factory data suggesting that stronger corporate earnings lie ahead. Adding to the dollar’s gains, the Chicago Purchasing Managers Index for March came in at 53.6 versus consensus forecast of 49.9 and the Institute for Supply Management, or ISM Manufacturing Index, checked in at 51.8 for March, up from 49.5 in February, above the consensus estimate of 50.6 and breaking a five-month streak of sub-50 readings.

Institute for Supply Management Index Chart

One would think that a nice bump in the manufacturing data would trigger selling in the bond market, but fixed income investors aren’t convinced that the one-month read is the beginning of a trend. Across the Pacific, a gloomy manufacturing report in Japan knocked global equity markets lower, with the Nikkei hitting a one-month low. According to a Japan Times’ April 1, 2016 article published by Reuters, The closely-watched Tankan survey, for lack of better word, “tanked.” Business sentiment among Japan's big manufacturers deteriorated to the lowest in nearly three years and is expected to worsen in the coming quarter. The Japanese economy may already be suffering from the yen’s two-month 10% rally.

The broad takeaway from this week’s crosscurrent of economic data is that while there are hints of improvement on the domestic economic front, the bond market sees the world quite differently, carrying the risk of a global slowdown eventually washing up on our shores. The commodity rally of late is under fresh scrutiny of being sustainable; the Fed is dialing back their rate hike ambitions; Japan is facing recessionary pressures; and little has changed in the downward trend for yields in fixed income markets.

In fact, the yield on the benchmark U.S. 10-yr Treasury fell this past week from 1.90% to 1.77%, heading back down to levels last seen in February – a troubling development – yet U.S. equities are favoring the move because there is nowhere better to go for yields than dividend-paying stocks. And it’s precisely these blue chip dividend stocks that are leading most sectors of the stock market higher. Very little of the safe-haven premium or value of a hedge against deflation appears to have come out.

Continuing growth in the U.S. labor market and steady growth in hourly earnings (2.3% y/y) have not raised the market’s implicit assumptions about growth or inflation. So, for the time being, bond investors and stock investors are of differing opinions about the prospects for economic growth.

The views of fixed income investors are generally afforded more value as they tend to be professionals and more price-sensitive. But global stocks, and especially those of emerging markets, are in rally mode as investors see a bottom in commodities and the end of a rising U.S. dollar that is a major headwind to dollar-denominated liabilities for corporate borrowers. Technically, it’s hard for me to make a case for selling Treasuries save for a short-term pause as a result of the rally in equities.

Ten Year Treasury Yield Index Chart

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

A Bullish Uncoupling of the Stocks to Oil

Two observations come to mind following last week’s market action. The first is how well the U.S. stock market traded against renewed selling in the oil patch. After trading briefly at $40.91 in mid-March, WTI crude had corrected 10% to close last Friday at $36.79 and still the S&P 500 closed at a fresh 2016 high of 2,072.78. That’s quite a change in market behavior, in which every move up and down for stocks has been tethered to the price swings in oil. Whether the rest of the market’s sectors can de-couple from the energy trade remains an open question.

The second notable development is the silver lining in the manufacturing numbers, complemented with another month of steady job gains. Both point to the notion of a better second quarter of economic activity, which may create the expectation of an earnings trough in the first quarter.

We’ll know by mid-April whether the rosier manufacturing numbers are genuine when forward corporate guidance accompanies first-quarter earnings or whether these data points are simply playing an April Fools’ joke on investors looking to lean into economically sensitive sectors of the equity market. There is definitely a growing penchant to pivot away from safety and into growth as evidenced by the rebound in many S&P 500 industrial stocks, while at the same time there is little if any give back in the ultra-defensive utility, telecom, and consumer staples sectors. Both camps can be right at the same time for a while and everyone gains. The beauty of earnings season is that we’ll soon know which camp is right.

Growth Mail:

*All content in "Growth Mail" is the opinion of Navellier & Associates and Gary Alexander*

50 Years of Global Trade Growth Now Threatened

by Gary Alexander

On April 5, 1966, the S&P 500 closed at 91.  It’s up nearly 23-fold since then, but that increase is dwarfed by the tsunami of global trade growth since 1966.  U.S. trade totaled just $50 billion in 1966, but is over $4 trillion per year today – an 80-fold increase.  Three developments that took place 50 years ago this month hastened that explosion of trade, according to FedEx CEO Fred Smith in his 50th class reunion talk at Yale (as summarized in the Wall Street Journal, March 26-27: “How Trade Made America Great”).

  • In April 1996, Malcom Purcell McLean introduced his revolutionary concept of shipping containers when his Sea-Land corporation launched its first trans-Atlantic shipments from New York to Rotterdam.  Containerization streamlined trade by eliminating the need for repeated handling of each item of cargo, while cutting theft, reducing inventory cost and loading time.  Says Smith, “Container ships have grown from carrying a few hundred boxes on each trip to the new Triple-E behemoths that transport over 18,000 containers called TEUs, or 20-foot-equivalent units. The cost is 1/500th the shipping rates per pound of the early 1960s.”
  • Also in April of 1966, Pan Am ordered 25 new 747 jumbo jets for cargo-carrying purposes.  The previous year, Pan Am CEO Juan Trippe asked his buddy Bill Allen, CEO of Boeing, to “think bigger” – much bigger – with his next project.  Pan Am was the first customer for the new 747, with its huge Pratt & Whitney fan jets.  The jumbo jet cut overseas costs by 70% for carrying cargo by air.  According to Smith, “Because of the cargo-carrying 747F, costs for trans-Pacific airfreight were dramatically reduced, a major factor in the extraordinary GDP growth of the Asian ‘Tiger’ economies of Hong Kong, Taiwan, Singapore and Japan.”
  • The April 1, 1966 issue of Laser Focus described another breakthrough, introduced in London the previous month by Charles Kuen Kao, a Chinese-born physicist (now a citizen of three nations: The U.K., the U.S., and Hong Kong).  He explained that fiber optics, about the width of a human hair, carried the equivalent of about 200 TV channels or over 200,000 telephone channels.  These fiber-optic cables (patented in 1966) soon ran undersea, “connecting the world at the speed of light, lowering voice and data-communication costs by orders of magnitude,” in Smith’s words.  Kao was awarded a Nobel Prize in 2009 for fiber optics.

These three business breakthroughs from 50 years ago went under the radar of the news events of the day, but they created the foundation for an 80-fold growth in U.S. trade over the last 50 years.  There were other developments along the way, but this miracle month gave us three dominant forms of transportation of goods and services abroad – via ship, airplane, or undersea cables.  Internally, railroads and trucks were able to refit to carry these ship containers across land to waiting customers, reducing distribution costs.

As Fred Smith concluded, “History shows that trade made easy, affordable and fast—political obstacles notwithstanding—always begets more trade, more jobs, more prosperity. From clipper ships to the computer age, despite economic cycles, conflict and shifting demographics, humans have demonstrated an innate desire to travel and trade. Given this, the future is unlikely to diverge from the arc of the past.”

World Exports of Goods and Services Chart

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

Bringing this chart up to date, according to the World Trade Organization (“International Trade Statistics 2015”), total merchandise trade in 2015 was $18.494 trillion, with an additional $4.94 trillion in services for a total of $23.4 trillion.  The Panama Canal is being widened to allow the most massive container ships to cross the Pacific and reach the Eastern U.S., but at the same time, the pace of global trade is slowing, and the U.S. trade deficit is expanding, due in large part to a strong U.S. dollar.  According to Ed Yardeni (in “Deep Blue Sea of GDP,” March 28), “The trade deficit has been a fairly steady drag on real GDP growth since Q1-2014. Over the past two years, exports have increased 1.7%, while imports advanced a much faster 8.4%. The relative strength of the U.S. economy and the Fed’s divergent monetary policy (vs. the ECB and BOJ) have strengthened the dollar since mid-2014, which continues to boost imports and depress exports. The relative weakness of the overseas economy is also weighing on U.S. exports.”

Four Widespread Myths about Trade

Today, as always, free trade is threatened by politicians, notably Donald Trump and Bernie Sanders, who want to punish other trading nations by raising barriers to their exports.  Today, given low growth in most of the world, rising wages in China, and lower energy prices, trade has slowed down and the future of trade looks uncertain, partly due to some common trade myths that dominate the political landscape:

Free trade costs jobs. Trump, Sanders (and other politicians) argue that free trade costs U.S. jobs, but the U.S. has added over 54 million net jobs since 1980 and 30 million net jobs in the 21 years since the North American Free Trade Agreement (NAFTA) was signed.  Trump pumps two populist myths at once – that we’re being overrun with Mexican immigrants and they are taking our jobs (in Mexico).  But if we want Mexicans to stop crashing our borders in search of better jobs, a more vibrant Mexican economy would certainly limit border flight.  It’s hard for me to understand someone who wants to close borders and limit trade.

Exports Trump Imports (pardon the pun): Mercantilists say we should export more than we import, calling that a “favorable balance of trade.”  In “Trade Deficit Angst” (Townhall.com, March 23, 2016), economist Walter Williams explains: “There cannot be a trade deficit in a true economic sense. Let's examine this. I buy more from my grocer than he buys from me. That means I have a trade deficit with my grocer…. When I purchase $100 worth of groceries, my goods account (groceries) rises, but my capital account (money) falls $100…if we included the capital accounts, we would see a trade balance.”

Over most of our history, since 1790, we have registered trade deficits most years, but we grew powerful anyway (source: econdatus.com). We had trade surpluses in nine of the 10 years during the Depression of the 1930s.  Japan has a huge trade surplus with the U.S. and they are suffering decades of stagnation.  In 2015, Americans purchased $482 billion worth of goods from China while the Chinese purchased only $116 billion worth of goods from us, producing a current account deficit with China of $366 billion.  But that only means the Chinese “purchased” a net $366 billion in greenbacks.  Last year, China held $1.2 trillion in U.S dollars.  (Japan owns slightly more and European countries hold over $1.5 trillion, making the U.S. dollar stronger.)  Having a surplus of goods seems at least as “favorable” as having a surplus of cash.

U.S. Manufacturing is Dead.  In “The Truth about Trade” (National Review, April 11), Scott Lincicome, an international trade attorney, says 90% of our manufacturing job loss since 2000 is due to productivity gains, but we are still “the world’s second-largest manufacturer (17.2% of total global output) and third-largest exporter. America also remains the world’s top destination for foreign direct investment ($384 billion in 2015 alone) — more than double second-place Hong Kong and almost triple third-place China.”

Protectionist barriers might save a few jobs in selected industries, but they would cost more jobs in the overall economy.  In the latest example, Lincicome reports, “When the Steelworkers convinced President Obama to impose 35% tariffs on Chinese tires in 2009, the result was, even under the best assumptions, a few unionized jobs saved at a cost to U.S. consumers of $900,000 per job.”  He also says this cuts both ways “as shiny new BMW, Toyota, and other foreign-owned plants across the American South attest.”

Nations Trade.  No, businesses trade on behalf of consumers.  The three inventions of April 1966 – large ship containers, jumbo jets, and fiber optic cable – were products of business innovation.  Governments (theirs and ours) only get in the way.  The proper role of government is to protect and enforce trade routes and the rule of law.  Congressional “free trade” bills with thousands of pork barrel exceptions aren’t free.

As Scott Lincicome puts it, global trade is “a breathtakingly complex global value chain — whereby producers across continents cooperate to produce a single product based on their respective comparative advantages — that could not be severed without crippling both them and the global economy.”  These “global value chains” include products with multi-national, multi-corporate input of parts and processes.

We certainly need better job-training and retraining programs.  We have lost our dynamic response to the changing economic landscape.  The Goldman Sachs Labor Market Dynamism Tracker, which was positive through the 1980s and ’90s, entered negative territory in 2001 and has remained there ever since. Lately, we have tended to reward joblessness with long-term benefits instead of encouraging job training.

Let me close with a note of hope.  Our slumping exports are due in large part to a stronger dollar, but in the opening quarter of 2016, the WSJ Dollar Index fell 4%.  Looking at the currencies which lead the U.S. trade volume, the dollar is down an average 5.7% against three of our biggest trading partners, the Euro-zone, Canada, and Japan.  The objects of Trump’s wrath, Mexico and China, are about even with the dollar:

Dollar versus Our Top Five Trade Partners Table

What if – miracle of miracles – America’s multinational exporters profited from this first-quarter decline in the dollar, as reflected in their earnings reports over the next month?  Could we see a relief rally when the earnings decline is far narrower than analysts expect?  That could be another reason to celebrate April.

Global Mail:

*All content in "Global Mail" is the opinion of Navellier & Associates and Ivan Martchev*

Why Treasuries Are Rallying

by Ivan Martchev

One peculiar thing over the past couple of weeks has been the breakdown in correlation between the price of oil and stocks. Oil has sold off but the stock market has not, which is the way it should be as low oil prices usually stimulate service-based economies like the U.S. and the UK, and can even help emerging economies like India.

The other peculiar breakdown in correlation that had been plaguing the stock market at the onset of 2016 is with bonds. A rallying Treasury market of late has not meant a stock market that is under pressure. Could it be that the four Fed rate hikes that the stock market feared at the beginning of 2016 will eventually be cancelled? It sure could, as well it should.

Thirty Day Fed Funds - Daily OHLC Chart

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

You can see the rally in the Treasury bonds as represented by iShares Barclays 20+ Yr Treasury Bond Fund (TLT) in green and the December 2016 Fed funds futures (in black) that started in early March. The 10-year Treasury note yield has gone from 2% to 1.79% in the process while Fed rate hike probabilities dropped as a rallying fed funds futures mean fewer rate hikes, calibrated as 100 less the ZQZ16 price.

One thing that is immediately evident in the chart is the strong correlation between the price of Treasury bonds and Fed funds futures prices. I have to note again that I have never seen the Treasury market surge the way it did after the beginning of a Fed rate hiking cycle. We went from a 2.32% high in 10-year note yield after the first rate hike to a low of 1.57% on February 11, which was 18 basis points away from an all-time low of 1.39% set in 2012. If we set an all-time low in Treasury yields in 2016, as I suspect is possible, then the world has a deflationary problem that the Fed has underestimated in a major way. (Please note: Ivan Martchev does not currently hold a position in TLT. Navellier & Associates, Inc. does currently own a position in TLT for some client portfolios.)

Why has the Fed not officially given up on rate hikes but rather ratcheted expectations from four hikes down to two at the latest FOMC meeting? Central banks typically take a gradualist approach. Cancelling all four rate hikes three months after officially announcing them would have been an embarrassing U-turn. Such a U-turn is coming, though, in my opinion, particularly if the Chinese devalue the yuan in 2016, which will be a highly deflationary event for the global economy. No sane central bank leadership should be hiking interest rates in the middle of a deflationary shock, particularly if those rate hikes affect the exchange rate of the world’s reserve currency – the U.S. dollar.

For the time being that same December 2016 fed funds futures contract still forecasts one fed rate hike as it closed at 99.44 on Friday, so the forecasted fed funds rate is 56 basis points. Since the present Fed target rate is 0.25-0.50% with the effective rate hovering in that range, the ZQZ16 contract is right now forecasting at most one more rate hike. It has to be noted that on February 11 that same fed funds futures contract was calling for one rate cut. I think the chance of having no more rate hikes in 2016 is very high.

This elimination of 2016 rate hike probabilities has rubbed off negatively on the U.S. dollar exchange rate with the most watched EURUSD rate well above parity (1:1) and the U.S. Dollar Index (DXY) in a broad sideways trading range. That said, I think it is a mistake to focus on the DXY index – which contains only six developed markets’ currencies – and instead one should focus on the Broad Trade Weighted Dollar Index which is a much better representation of the dollar exchange rate against a broader basket of currencies weighted by trade numbers as the index name suggests.

United States Dollar Index versus West Texas Intermediate Crude Oil Prices Chart

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

The much broader trade-weighted currency index includes the Euro Area, Canada, Japan, Mexico, China, the United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile, and Colombia. The DXY index is a much narrower subset of this broader index.

The correlation of oil and other commodities with the broad trade-weighted dollar index is undeniable as many of the components are currencies affected by commodity prices. There are two hard pegs in this index that are at very high risk of de-pegging – Saudi Arabia and China. There is a reasonable chance that one of these devalues by the end of 2016, but I believe the chances are high that one or both devalue by the end of 2017.

China is likely to devalue, as it did in 1994 by 34%, as it tries to stimulate its economy via a different mechanism, as its financial system is not operating properly after what appears to be a busted credit bubble with rising non-performing loans. Monetary stimulation may not solve the situation and one can easily see that the alternative stimulation mechanism of a devaluation that has been used before is likely to be used again. Saudi Arabia may devalue as the oil price may break $20 per barrel, with Iran now back on global markets at a time of record global production and inventories and uncertain cyclical demand. This also means that the sell-off in the broad trade-weighted dollar indexmay only be a correction.

Mind the Yen

One of the more important cross rates of late has been that of USDJPY where the Bank of Japan could not stop the appreciation of the yen with its surprise move to go towards negative short-term interest rates in the funding markets for the banking institutions it supervises. The original weakening of the yen was later met with an epic surge from 121 to a hair above 111 (the yen has an inverted chart where less yen per U.S. dollar means a stronger yen).

United States Dollar versus Japanese Yen - Daily OHLC Chart

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

This looks like a major bottom in the yen has been put in (it looks like a major top on this inverted chart).  This is one of those fascinating cases where the fundamentals – like central bank policy – suggest that the yen should be weakening, but instead it is doing exactly the opposite. This is because way too many global financial institutions have put on way too many “carry trades” at the wrong time, using the yen as a funding currency, with those carry trades being unwound the yen is surging. (See CNBC.com February 11, 2016, “Yen jumps against dollar as carry trade wanes, despite BOJ’s negative rates policy”)

I think that if the Chinese devalued by a large amount, similar to what they did in 1994, the yen may surge past 100. This is because the coming Chinese devaluation is highly deflationary and would cause even more carry trade unwinding.

Japanese Ten Year Government Bond Chart

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

It is surreal to watch 10-year Japanese Government bonds (JGBs) meander into negative yields (-0.06% at last count), but they were not the first to cross the zero barrier. The first 10-year bonds to go negative were Swiss government bonds, which at last count yield -0.34%. The world has a massive deflationary problem of negative-yielding JGBs and Swiss government bonds that clearly point to deflation.

There is currently about $6 trillion in negative-yielding government debt, especially in the short- and intermediate-term maturities. The coming Chinese devaluation will only add to that global deflation. Hiking U.S. short-term interest rates in this environment can only be viewed as ludicrous.

Sector Spotlight:

*All content in "Sector Spotlight" is the opinion of Navellier & Associates and Jason Bodner*

Momentum Trading in Markets and Life

by Jason Bodner

A supernova is a monstrous explosion, second and third only to a hypernova (a really big supernova) or the Big Bang itself. Supernovae occur when the nuclear fusion fueling the star reaches a tipping point. The star runs out of hydrogen, then helium, then other elements on down the line to fuse. Eventually it makes iron, which is lethal to a star. The force of gravity wins and the star collapses on itself resulting in a spectacular explosion. Some of the remnants of the cores of supernovae are neutron stars, which are extraordinarily dense and small. When a neutron star is spinning quickly, it resembles a lighthouse in the cosmos. It’s known as a pulsar. The fastest ones spin more than 700 times per second. Only the enormous energy of a supernova can set a pulsar on its spin. But what keeps it spinning for billions of years?

Neutron Star Image

Momentum is a really cool property of physics that we are all familiar with. If you have fallen flat on your face, you have experienced the sudden slowing of momentum. If an object is hurled into space, linear momentum should keep it going on its trajectory. In a perfect vacuum, it should continue forever. But objects that spin are slaves to angular momentum. All that’s needed in space is a force to set it spinning and angular momentum will keep it going, seemingly forever. As an example of angular momentum keeping an object in spin, think of spinning a billiard ball on a billiard table. It will spin for quite some time until the friction from the felt table slows it down. The earth also has angular momentum spinning on its axis as well as orbiting around the sun. The earth has been spinning for billions of years but it has actually been slowing down. In fact, one day to a dinosaur 250 million years ago was only 23 hours!

It’s clear to see that momentum is a powerful force. It is also a powerful force in markets. In chaotic environments, it’s natural to assign a quick label to something. In the chaos that is the financial markets, it’s easy to understand how investment managers get labelled “momentum investors” as opposed to taking the necessary time to look at the full capabilities of the manager. It's an important distinction to make since, in the past, Louis Navellier has often been mistakenly labeled as a “momentum investor.”

While it’s flattering to be known well enough to be labeled anything, that doesn’t always mean it’s an accurate label. None of the factors in the Navellier & Associates portfolios consider price momentum. In fact, Navellier’s strategies employ no momentum at all. This is why (as we have discussed for months now) you typically won’t find high-flying, trendy stocks that move purely on momentum in Navellier & Associates’ managed portfolios.

For instance, Louis has often criticized Amazon.com. While a great company with tons of innovation and utility, it trades at a gigantic multiple. Even after a 30% sell-off from its high, and a subsequent rally to currently 15% off its high, it still has a 478 P/E. We don’t own it. We may look at earnings momentum, but not price momentum. A more accurate label for us would be GARP (growth at a reasonable price). We won't pay an enormous premium for growth, but we will pay a reasonable price for that growth.

(Please note: Jason Bodner does not currently hold a position in AMZN. Navellier & Associates, Inc. does not currently own a position in AMZN for client portfolios; however, Navellier & Associates, Inc. did hold a position in AMZN for some past client portfolios.)

There’s nothing wrong with following momentum. A basic tenet of momentum trading is to try to identify the intensity of price momentum (up or down) and hop onboard. In markets, momentum trading has appealing qualities, like trend following, which works great – until it doesn't. Could momentum explain the current market? Bloomberg put out an article last Friday titled, “Hedge Fund Momentum Trade Blows Up With Losses Worst Since 2009.” As the ominous title suggests, the author details how momentum strategies are performing poorly so far in 2016. Last year was a great year for “mo-mo” traders; but as the space became crowded and the market went haywire, the strategy has seemingly broken down. It’s like when someone yells fire in a movie theater: Crowds tend to make a panicked beeline for the exits.

Is this what we are witnessing among certain sectors?

Shifting Momentum among the Sectors

Picking through sectors and identifying fundamental reasons for why sectors have been behaving the way they have recently is a tough task these days. Let’s take a look at the recent leaders and laggards:

Standard and Poor's 500 Sector Indices Changes Tables

If we look at what’s been leading this market the past month, we see Information Technology putting in a strong 10+% performance, but it was only up less than 3% in the past three months. Tech has made up significant ground as we can see in the V-shaped chart below. Financials have also been performing quite well making up for its abysmal 3-month performance. Weakness remains concentrated in Healthcare and Energy, as we can see in the charts below.

Standard and Poor's 500 Yearly Sector Indices Charts

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

This major rally has been one of eerie calm. Volumes have been thin. It’s like the scenes in a horror movie when you get this creepy feeling that someone is about to get it. When polling the financial professionals I speak with, it seems as though everyone is waiting for the market to tank again. Utilities and Telecom have been the clear leading sectors, performing well for a while now. These are not the typical engines of a bull market. These are the sectors representing safety, quality, and income. In the meantime, positive data seems to be leaking out, but just enough to warrant a cautious stance by the Fed.

M.C. Escher said, “We adore chaos because we love to produce order.” As order has seemingly returned out of the chaos at the bloody start of the year for the equity markets, it helps to look into what is really driving markets. We see weakness in ordinarily strong sectors and strength in sectors ordinarily left alone. Until I see strong earnings data and more positive economic data, this rally is still suspect for me.

A Look Ahead:

*All content in this "A Look Ahead" section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

April is the Best Market Month

by Louis Navellier

April is the best market month of the year going back 20 or 50 years, according to Bespoke Investment Group (“April Seasonality; Returns After a Strong March,” March 31).  The S&P 500 has risen 2.6% on average in April in the past 20 years and +2.1% over the last 50 years.  The second-best months lag far behind: October is #2 for the last 20 years at +2.1%, and December is #2 for the last 50 years at +1.5%.

In March, the DJIA rose 7.1% and the S&P rose 6.6%.  Bespoke added a list of all months in which the S&P 500 gained 5% or more.  In the following month, the median increase was 1.3% and the next three months registered a median 4.54% gain, more than double the normal 0.6% or 1.84% gains, respectively.

A couple of reasons why the stock market is seasonally strong in April are new pension funding as well as the fact that the best first-quarter earnings announcements tend to come out early.  Right now, earnings are expected to decline substantially in the first quarter, but we might see some positive surprises first.

What Happens After a “V” Shaped Quarter?

The folks at Bespoke published another special report last week (“Down and Up,” March 28) that showed that when there is a V-shaped stock market in the first quarter – down over 10%, then up over 10% – in all years since 1932, the stock market has gone on to gain an average 28.3% in the rest of the year!

In the first quarter 2016, it happened again, with a 10% decline in both the DJIA and S&P 500 from January 1 to February 11 and then a 13% recovery in both indexes from February 12 to March 31.  What generally happens next has usually been very dramatic.  Omitting the 1930s, when the market was deeply depressed and much smaller, such a huge V-shaped opening quarter has only happened three times since 1939:

Here are the recent first quarters that most closely resemble the dramatic first quarter of 2016:

Standard and Poor's 500 Nine Month Gains Table

The most recent recoveries – in 2003 and 2009 – followed long and strong bear markets, giving birth to long and strong bull markets.  In 1980, however, the stock market remained volatile and risky for another two years – until August of 1982, when El Toro Grande began.  This time around, we’ve only seen a minor correction (historically speaking) since the market peaks last May; but it is still encouraging to see such dramatic gains in the nine months following the latest and most dramatic “V” shaped first quarters.


It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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