New Market Highs Mask a War

New Market Highs Mask a War Between the Sectors

by Louis Navellier

August 16, 2016

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

The overall stock market closed at a new high last week, but only two of the 10 S&P sectors hit new highs, namely Consumer Discretionary and Technology.  The recent trend has shown a stock market that continues to reward stocks that were previously depressed.  There is no doubt that this washing machine “agitation cycle” has benefited the algorithmic traders that now account for a disproportionate amount of daily trading volume.  For example, energy stocks had a surprisingly good opening last Monday, based on a grossly misleading report that OPEC would restrict output so that crude oil prices could rise despite the worldwide glut and the fact that we will soon see a collapse in seasonal demand, which typically commences after Labor Day.  However, the latest rebound in energy stocks fizzled a bit when crude oil prices stumbled briefly on news of rising inventories for crude oil and refined products as well as higher rig counts.

Irrigated Crop Circles Image

Speaking of crude oil, I should add that the Financial Times reported on Wednesday that Saudi Arabia’s production hit an all-time record high of 10.67 million barrels in July as it tried to crowd out its OPEC peers by locking up lucrative long-term Asian contracts.  Then, on Thursday, the International Energy Agency trimmed its forecast for global crude oil demand in 2017 due to slowing global economic growth, warning that the “massive” inventory overhang is keeping a lid on crude oil prices.  Finally, on Friday, Saudi Arabia said that it would work to firm up crude oil prices, which is a bogus claim since it and other OPEC members have abandoned all production quotas as every country is trying to out-produce the others.

Interestingly, healthcare-related stocks were hit pretty hard last week on persistent ETF selling pressure on the belief that Hillary Clinton will become our next President and crack down on steadily-rising healthcare costs.  This healthcare sell-off seems to be just profit-taking and a gross overreaction to recent Presidential polls favoring Hillary Clinton, but those polls should narrow a bit after the first Presidential debate.  Still, there is no doubt that we are in the “silly season” as algorithmic traders and ETF investors often embrace and then slam selected sectors.  This kind of sector volatility will likely persist for the foreseeable future. 

In This Issue

In Income Mail, Bryan Perry will examine the latest economic data in light of its impact on the Fed’s interest rate policy.  In Growth Mail, Gary Alexander takes us back in his time machine to this date 45 years ago, when Nixon closed the gold window and investors launched a revolution that is still unfolding.  In Global Mail, Ivan Martchev examines British bonds (‘gilts’) and the meaning of August’s low volatility. Jason Bodner will expand on my comments (above) about the rapid shuffling of sector strength, and then I will return to examine the slowly-disappearing stock market, due mainly to corporate share buy-backs.

Income Mail:
Retail Data Falls Flat, Sending Dollar and Bond Yields Lower
by Bryan Perry
Copper Signals Non-Confirmation of the Emerging Markets Rally

Growth Mail:
Free Choice in Investing – A Novel Idea 45 Years Ago
by Gary Alexander
The Battle for Investment Freedom, 1971-75

Global Mail:
The Gilts’ Death Watch
by Ivan Martchev
A 52-Week Low in Stock Market Volatility

Sector Spotlight:
“Big Data” is Here to Stay
by Jason Bodner
Information Technology Leads the Summer Sector Sweepstakes

A Look Ahead:
The Slowly Disappearing Market of Stocks
by Louis Navellier
Why Rates Will Likely Stay Low – Encouraging More Buy-backs

Income Mail:

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

Retail Data Falls Flat, Sending Dollar and Bond Yields Lower

by Bryan Perry

Once again, the Fed’s best intentions of constructing a narrative for raising interest rates this year have been thwarted, this time by the economic calendar. According to U.S. Census Bureau data released last Friday, retail sales for July came in flat, even though they were expected to rise by 0.4%, keeping a three-month streak alive (see chart, below). Excluding autos, retail sales declined 0.3% with lower gasoline sales (-2.7%) being the main drag on the data. Other weak spots included sporting goods, hobby, book, and music stores (-2.2%); food and beverage stores (-0.6%); building material and garden equipment and supplies dealers (-0.5%); clothing and accessories (-0.5%); food services and drinking places (-0.2%); general merchandise stores (-0.1%); and electronics and appliance stores (-0.1%).

Motor vehicles and parts dealers (+1.1%) provided a positive offset of sorts, but by and large there was a slowdown in sales across most categories following a relatively strong sales performance in June. Core retail sales, which exclude auto, gasoline station, building material, and food services sales, were flat.

United States Retail Sales Bar Chart

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

It’s important to look at all the details of the monthly retail data because there is always the possibility of a specifically large negative number from one of the sub-categories. The July data, however, revealed a soft patch across the spectrum. The key takeaway from the retail sales report is that the consumer, which everyone is counting on to drive economic activity, slowed his/her pace of discretionary spending in July.

Treasuries made an about-face from recent selling pressure, with bond prices spiking on the news, taking the benchmark 10-year Treasury Note yield back down to 1.48% from last Monday’s high of 1.62%.

The dollar also fell to its lowest level since June 23 in accordance with the notion that the Fed will be in no rush to raise interest rates this year. Wholesale prices as measured by the Producer Price Index (PPI) sank unexpectedly by the most in almost a year, reinforcing that outlook. These two downer reports only support the ongoing belief that central bank stimulus and low inflation is a bullish backdrop for equities. That is why there is little if any give back in the U.S. or global stock markets after the S&P 500 closed at an all-time high approaching 2200 last week, matched by all-time highs set in the Dow and NASDAQ.

Copper Signals Non-Confirmation of the Emerging Markets Rally

In light of watching emerging markets break out to fresh 2016 highs, one leading indicator of economic growth – namely copper prices – has yet to confirm that demand is on the rise. The five-year chart (below) shows copper prices bumping along the low end of the range, reflecting not just lower demand from China, which in my view is already priced into the copper market, but also from the other emerging markets, where demand for copper is a good benchmark for future growth.

Five Year Copper Spot Chart

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

To illustrate this point of view, right up through the end of 2015, copper prices as represented by the iPath Bloomberg Copper Subindex Total Return ETF (JJC) and shares of the iShares MSCI Emerging Markets ETF (EEM) traded in tandem with each other while China’s growth rate was slowing, as that country transitions to a well-telegraphed more consumer-driven economy. As the chart below clearly shows, shares of EEM are hitting up against major overhead technical resistance that was representative of no less than six successful tests of support before breaking down in mid-2015. Chasing emerging markets at this juncture after this latest euphoric rally based materially on central bank stimulus could prove short-lived if real demand for the industrial metals doesn’t kick in. The recent decoupling of EEM shares rallying without copper raises a yellow flag in my book. It has the look and feel of a classic case of a bull trap from a technical standpoint and quite possibly a structural and fundamental value trap as well.

(Please note: Bryan Perry does not currently hold a position in (JJC) and shares of (EEM). Navellier & Associates does not currently own a position in (JJC) for any clients but Navellier does own (EEM) for client portfolios).

Emerging Markets Exchange Traded Fund Chart

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

Despite the rationale that cheap oil ought to be a bullish catalyst, the stock market is still joined at the hip with the direction of oil prices. After WTI crude traded briefly under $40 per barrel, the S&P pulled back off its highs only to reassert itself as crude traded back up to $44. Zachs Research spelled it out pretty clearly: lower oil prices = lower energy costs = more money to spend on everything else = only oil related stocks should go down on this news = other stocks should go up. Saudi Arabia signaled that it is prepared to discuss stabilizing markets at informal OPEC discussions next month after prices tumbled from the recent high of $53 per barrel down to $40.

OPEC is effectively busted and the global oil market reflects more of an “every man for himself” landscape. As oil stays in the $40 to $45 range, equity markets should keep trading higher, but with seasonal demand about to hit the proverbial wall after Labor Day weekend, a test of $40 or lower carries a high probability. The U.S. oil rig count rose for the seventh-straight week last week, according to the latest (August 12) data from oil driller Baker Hughes. Last week the rig count jumped by 15 to 396, the highest level since February 26.
My net takeaway this week is this: Don’t chase the bounce in oil or emerging markets. Stick with the Navellier dividend strategies Stay at home (i.e., in domestic stocks) and keep it simple. As Louie likes to tell our Private Client Group clients, we want you to have a smooth ride in bumpy markets.

Growth Mail:

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

Free Choice in Investing – A Novel Idea 45 Years Ago

by Gary Alexander

Today marks a red-letter day in the history of gold in America.  On August 16, 1896, George Carmack discovered one of the largest gold strikes in history on Rabbit Creek in Canada’s Yukon Territory, just across the border from Alaska.  A century ago this week (August 14, 1916), Denmark approved the sale of the Virgin Islands to America for $25 million in gold – another land-grab bargain made possible by taking advantage of cash-starved European nations during a World War.  And on August 16, 1925, Charlie Chaplin’s silent film classic, The Gold Rush, inspired by the 1849 gold rush, opened to U.S. audiences.

The most dramatic golden event in U.S. history came 45 years ago on Monday, August 16, 1971, when the Dow Jones Industrial Average rose 33 points (+3.8%) the morning after President Richard M. Nixon appeared on national TV to “close the gold window” (refusing to honor the $35 per ounce price of gold), effectively devaluing the dollar.  Nixon also imposed wage and price controls (in response to a 3% CPI inflation rate!), and a 10% surcharge on all imports.  You would think this package of central controls of the economy in a free nation would have caused stocks to fall, but Nixon’s moves were very popular at the time.

A poll of 220 households by Albert E. Sindlinger & Co. on August 16 revealed that 75% of Americans favored the President’s proposals, while “most of those who dissented did so on the ground that Mr. Nixon’s actions should have come sooner.”  Mr. Sindlinger said, “In all the years I’ve been doing this business – more than 15 – I’ve never seen anything this unanimous, unless maybe it was Pearl Harbor.”

I was on deadline at a major magazine writing about Nixon’s 1971 Dollar Crisis.  I was shocked but not surprised by the announcement, since I had read Harry Browne’s 1970 book on the Coming Devaluation. I came to know at least three other people who were so shocked by Nixon’s move that they launched new businesses.  All three of them intersected my life over the following decades: (1) New Orleans school teacher James U. Blanchard III formed The National Committee to Legalize Gold. Also: (2) David Nolan saw Nixon’s speech in his Colorado living room and decided to form the Libertarian Party; and (3) Robert D. Kephart, publisher of Human Events decided to publish an “Inflation Survival Letter” (which morphed into “Personal Finance”) to help investors survive the inflation that was certain to follow price controls.  (Full disclosure: I eventually edited publications for Bob Kephart and Jim Blanchard during the 1980s).

It’s still hard to believe that it was illegal for Americans to own most forms of gold from 1933 to 1974. On April 5, 1933, FDR’s Executive Order 6102 demanded we surrender our gold for $20.67 per ounce. Those who stuffed this inert metal in a mattress or vault risked 5-10 years in prison and/or a $10,000 fine!

This gold story ends with a Pyrrhic victory for gold investors.  On August 14, 1974, Congress authorized U.S. citizens to own gold for the first time in 41 years, as of December 31.  This was a Pyrrhic victory since Americans missed all the gains from $20 (in 1933) to $195 (the gold price on December 30, 1974). Alas, gold then proceeded to fall sharply after it was legal to own, falling to $102.20 on August 30, 1976.

Value of Gold Image

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

The gold story was one of several similar stories reflecting an investment revolution in the early 1970s.

The Battle for Investment Freedom, 1971-75

As the 1970s dawned, Americans were extremely limited in their investment choices.  Treasury bills were prohibitively expensive ($10,000 minimum), banks were forbidden to offer interest on demand deposits, and savings rates were capped by Regulation Q.  Foreign exchange was nearly impossible for Americans to buy, as was gold.  Established brokers charged up to 8.5% for small orders by retail investors, and your choice of pension was limited to Social Security or a big defined-benefit pension at a major corporation.

These dominoes began to fall in the early 1970s.  In addition to gold legalization, we saw these changes:

  • Treasury Bills: James Benham, a bank examiner in the San Francisco Federal Reserve Bank quit his job in 1972 to launch the first mutual fund in short-term Treasuries, the Benham Capital Preservation Fund (since merged with others) for a $1,000 minimum.  I interviewed him in the Fall 1986 edition of Wealth Magazine, when he accurately predicted the long-term decline in interest rates we’ve seen since 1981, fueling a major bull market in bonds as interest rates fell.
  • Private Pensions were introduced by the Employee Retirement Income Security Act (ERISA) of 1974, which allowed for the creation of tax-advantaged Individual Retirement Accounts (IRAs).  This revolution followed a 1972 NBC broadcast of an hour-long expose of “The Broken Promise” of corporate pension plans, later exacerbated by the inflationary decade of the 1970s.  In 1974, Pete Dickinson launched The Retirement Letter in response to ERISA (I helped edit that later on).
  • Discount Brokers were born on May Day, 1975, when a 37-year-old Stanford MBA Charles Schwab and Muriel Siebert, 46, the first woman to earn a seat on the NYSE, helped to launch a “no-frills” discount brokers’ revolution.  Before that, “full-service” brokers tended to make all the decisions for private investors, charging fees of up to 8.5%.  It often cost hundreds of dollars to buy 500 shares of a blue-chip company stock.  Now, such a trade routinely costs under $10.

So, in just eight months stretching from September 2, 1974 (the passage of ERISA) through December 31, 1974 (the freedom to own gold) and May 1, 1975 (the discount brokers’ opening day), U.S. investors gained three important new freedoms.  It’s no coincidence that the stock market took off after investors could create and fund their IRAs through buying stocks and mutual funds at discount fees.  The S&P 500 rose from an intraday low of 60.96 on October 4, 1974 to 2185 last Friday, up 3,484% in the last 42 years.

Standard and Poor's 500 Performance Chart

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

In the mid-1980s, there were a few more aftershocks of the investors’ revolution, including: 

  • Bank Savings: Regulation Q, passed in 1933, forbid banks from paying interest on demand deposits (checking accounts).  It also imposed a cap on savings deposit interest rates, which led to the birth of money market funds.  As a result of political challenges to interest rate ceilings in a time of high inflation, Congress phased out these ceilings for interest rates at banks between 1981 and 1986, but by that time inflation had depleted many middle-class Americans’ bank savings.
  • Foreign Currency accounts for American investors were introduced by Mark Twain Bank of St. Louis, via their World Currency Accounts in 1986.  This came just after the dollar had reached an unsustainable peak in 1985.  Before that, it was very difficult for Americans to switch currencies.  (Mark Twain was later acquired by another bank and the currency accounts went to EverBank.)

It may be frustrating to see so many investment derivatives around these days, but it beats having too few choices.  We’ve also enjoyed greater choice as consumers.  In 1970, there was a Big-3 automobile triopoly.  There were also just three major networks – NBC, ABC, and CBS, along with a PBS alternative in some markets.  Now, we have hundreds of cable or satellite channels and multiple vehicle makers.  But there’s one field in which Americans are denied any real choice – the duo-poly of Republicans and Democrats.

“I am not a member of any organized political party.  I’m a Democrat.” – Will Rogers
“It’s my Party, and I’ll cry if I want to.”– A 1963 hit which could be a 2016 Republican anthem.

In 1972, we had the unappetizing choice of Richard Nixon or George McGovern for President, but there was also the first Libertarian Party ticket, with VP candidate Tonie Nathan becoming the first woman to win a vote in the Electoral College.  This year, we must plug our noses and choose between Donald Trump and Hillary Clinton, but we also have the choice to foment a revolution by voting Green or Libertarian.

Perhaps this is the year when voters will stage the kind of rebellion that we investors staged in the 1970s.

Global Mail:

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

The Gilts’ Death Watch

by Ivan Martchev

With a cut in its policy rate to a record low 25 basis points (0.25%) in early August, the Bank of England practically admitted that Brexit has affected the UK economy rather negatively. Before the Brexit vote, they were mulling a rate hike, so this is a complete about-face. In many respects, this rate cut was already a forgone conclusion, as gilts – the name for UK government bonds – had been registering record-low yields ever since the Brexit vote. The 10-year gilt closed on Friday at an all-time low yield of 0.52%.

United Kingdom Ten Year Government Bond Chart

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

It would not be an overstatement to say that gilts are now on “death watch,” as the UK is the next major government bond market that is likely to dive into negative yield territory, which would have been an unheard-of development before the present pandemic of global deflation. Two-year gilts closed at 14 basis points on Friday while five-year gilts closed at 18 bps. The way this death spiral has worked before – for other government bond markets, like Switzerland or Germany – two-year debt turns negative first, then 5-year, and then 10’s, and so on; we have also seen 20-year government bonds having negative yields in Japan.

Negative yields on government debt can be characterized as a death spiral because they signify an economic problem that is not easy to fix. The $12 trillion or so of negatively-yielding government bonds in the world today signify a failure of central banking to promote sustainable economic growth. If the major accomplishment of central banks is to shove mountains of debt down the throats of the financial systems they oversee to goose up economic growth for the present generation – in reality, borrowing growth from the future, hurting future generations – I can only characterize that policy as a failure.

Interest Rates During the Last 5000 Years Chart

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

Bank of America put together this chart (above), basically showing that interest rates at present are the lowest in the 5,000-year history of recorded history. This 5,000-year composite chart uses the prevailing rates for the major economic powers in the world at the time, starting from Mesopotamia and going on to Babylon, Greece, Rome, Byzantium, and ending in the U.S. The all-time low in global interest rates at present means we are in uncharted territory. This uncharted territory seems to be expanding with the UK, whose chances of seeing negatively-yielding gilts are overwhelming due to the Brexit economic effects, and other European countries like France, Italy, and Spain going down the same deflationary black hole.

50 Centuries of Interest Rates

  • Mesopotamia, c 3000 BC: 20%
  • Babylon, Code of Hammurabi, 1772 BC: codified earlier Sumerian custom of 20%.
  • Persian conquest (King Cyrus takes Babylon), 539 BC: rates of 40+%.
  • Greece, Temple at Delos, c. 500 BC: 10%
  • Rome, Twelve Tables, 443 BC: 8.33%
  • Athens/Rome: circa the first two Punic Wars, 300-200 BC: 8%
  • Rome: 1 AD: 4%
  • Rome, under Diocletian, 300 AD: 15% (estimated)
  • Byzantine Empire, under Constantine, 325 AD: limit 12.5%
  • Byzantine Empire, Code of Justinian, 528 AD: limit 8%
  • Italian cities, c. 1150: 20%
  • Venice, 1430s: 20%
  • Venice, (Leonardo da Vinci paints "The Last Supper” in Milan), 1490s: 6.25%
  • Holland, beginning of the Eighty Years' War, 1570s: 8.13%
  • England, 1700s: 9.92%
  • U.S., West Florida annexed by the U.S., 1810s: 7.64%
  • U.S., circa World War II, 1940s: 1.85%
  • U.S., Reagan administration, 1980s: 15.84%
  • U.S., Fed from December 2008 to December 2015: Zero to 0.25%
  • + Japan and most of Europe in 2016: Sub-zero interest rates

Source: Business Insider

Other than gilts, which technically are appreciating as they march towards negative yield territory, the other casualty of the Brexit vote is the British pound, which closed on Friday at $1.2911, barely a cent above the 31-year low of 1.2798, reached after the disastrous Brexit vote. The GBPUSD cross rate has been consolidating for the past 6-7 weeks, forming what currency traders refer to as a “bearish flag.” It is bearish if the flag pole is pointing down and we just broke down from the flag-resembling consolidation (see chart, below). This bearish flag pattern suggests a downside the length of the flag pole (roughly 22 cents) projecting downward from the point of breakdown outside of the consolidation pattern (roughly $1.32). Purely based on this technical pattern, the pound can go as low $1.10. While I don’t dismiss chart patterns, I also like to know what is going on behind them, so I follow a lot more than the chart patterns.

British Pound versus United States Dollar - Daily OHLC Chart

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

In 1985, the pound got as low as $1.05 in a very different global interest rate environment (see July 6, 2016 Marketwatch article “The Brexit currency domino effect isn’t over yet”). Brexit adds to the deflationary backdrop in the remaining EU countries as it makes Eurozone deflationary pressures worse.

Euro Versus United States Dollar - Weekly OHLC Chart

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

In other words, Brexit is bearish for the euro, too. This is why I am surprised to see the EURUSD rate meander near the levels it saw before the Brexit referendum while the British pound has seen substantial downside and appears to be starting a second leg lower. I think this roughly 10-cent trading range in the EURUSD cross rate (with a few stabs outside of $1.05-$1.15) will be taken out to the downside. When the euro breaks down from that consolidation range, I do not believe that parity (1:1) will halt the decline.

A 52-Week Low in Stock Market Volatility

As of mid-August 2016, the stock market registered a 52-week low in implied volatility. I have begun to get plenty of questions from investors about whether or not I think we can get another volatile market swing like we saw last August, when we saw a surge of market volatility from the low teens in the S&P 500 Volatility Index (VIX) all the way up to 53.29 in a matter of four days (see chart, below).

CBOE Volatility Index - Daily OHLC Chart

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

The S&P 500 Volatility Index, dubbed “the VIX,” simply measures how expensive short-term options on the S&P 500 Index cost. The more investors are willing to pay for such near-term protection, the more panicked they are. The VIX measures how investors price the implied volatility of the index and in that regard it is a forecast; but the VIX is not a very good forecasting tool unless one is a contrarian, which means there are plenty of more sophisticated investors that sell stocks in a low VIX environment and buy stocks in a high VIX environment. A low VIX is not an automatic sell signal, though, and neither is a high VIX an automatic buy signal. The real trading world is quite a bit more complicated than that.

A low VIX (by itself) does not predict an imminent surge in stock market volatility as it can stay depressed for quite a while. Last year, the trigger was the Chinese devaluation, which some feel came out of left field. The yuan has kept on depreciating in calculated fits and starts, yet the U.S. stock market surged to an all-time high last week. So as long as the yuan glides lower – i.e., more yuans per dollar is a weaker yuan on an inverted chart – the decline is going to be manageable.

Chinese Yuan Versus United States Dollar - Weekly OHLC Chart

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

A sharp yuan devaluation is the ultimate monetary policy panic button for the Chinese authorities as it stimulates the Chinese economy in a way that conventional monetary policy cannot deliver. It is also true that conventional monetary policy does not work well in a situation where the Chinese banking system is feeling the effects of its busted credit bubble. The Chinese devalued by 34% in late 1994 after a recession (that was not officially acknowledged). They may choose to devalue again as I believe they are marching towards a hard economic landing. The trouble is, the PBOC won’t give us any warnings in advance.

There can be other triggers that cause the VIX to surge, but those triggers are unknowable ahead of time.

In summary, a 52-week low in the VIX is a cause for concern but not a guarantee of a sell-off. If there is an “out of left field” trigger, though, a surge in volatility is likely, although the timing can’t be predicted.

Sector Spotlight:

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

“Big Data” is Here to Stay

by Jason Bodner

When we think of binary numbers, we may think of ultra-modern offices with mad geniuses hovered in front of a dark screen full of computer codes resembling hieroglyphics. Or we may imagine the limitless internet as a vast black hole of zeros and ones. Either way, invariably binary numbers elicit an image of modernity. But, in fact, the concept of binary numbers is quite old. Binary numbers can be traced back to Vedic literature – the Shastras, written in Sanskrit, considered to be the first written language of man.

A person known as Pingala wrote Chandaḥśāstra around 500 BC. It contained the first known description of a binary numerical system. Pingala also developed the Fibonacci number series (presented later by Fibonacci in 1202 AD) and Pascal’s triangle (Blaise Pascal, in 1653 AD). So these two essential mathematical concepts were introduced almost 2,000 years before they became famous by their European namesakes. What makes the history of binary code even more fascinating, is that even though committed to paper possibly 2,500 years ago, Sanskrit was primarily a sung language prior to that. It could have been around much longer; we just don’t know. In short, our adoption of binary code into computers exploded only within the past 50 years. Something that has been laying around virtually dormant for thousands of years was seized upon and integrated in a way that will forever alter the course of mankind.

Sanskrit Binary Number System Image

What fascinates me is that although binary code is seemingly intimidating and complicated, it is actually the simplest reduction of communication. Binary only means that a switch is just off or on. As the word implies, binary offers only two possible outcomes, zero or one – off or on. When we think of binary code, it may conjure up images of “The Matrix” with the world that we perceive actually masking the reality of everything being a green zero or one. We may not, however, think about our refrigerator or stove in that regard, but the prevalence of tiny computers has made its way even into these more mundane items.

Matrix Bits Image

It is an undeniable fact that our lives are run on binary code. It is used to instruct computers, and represent every form of data we can think of. On a recent business trip, I had the good fortune to meet with over 20 types of professional money managers – including traditional value investors of the Buffett-Munger discipline, research driven investing over a sizeable universe involving management calls and corporate meetings, through quantitative investment managers. Having been exposed to a wide spectrum of investment philosophies and styles, I was left struck by one predominant theme woven through every meeting.

Despite different strategies and different time horizons, data was the key topic. Quantitative analytics is proving to be something that most managers feel they need to consider, if not integrate into their process, even if they are not fully convinced how they should use it. One meeting found me sitting across from the first data scientist in a firm’s 30+ year history. To me, this points clearly to a shift of focus to quantitative data. One manager summed it up by saying that fundamentals were essential but the methodologies of how to deal with them are changing with the times. The overall sentiment is that big data is here to stay.

Big data is defined as extremely large data sets that may be analyzed computationally to reveal patterns, trends, and associations, especially relating to human behavior and interactions. The following Google Trends graph helps sum up what we see, hear, and feel more on a daily basis in relation to the growing prevalence of big data. (Note: In this Google Trends map, “The Internet of Things” refers to developing internet connectivity to everyday objects, and SMAC refers to Social, Mobile, Analytics, and Cloud.)

Google Trends Image

Information Technology Leads the Summer Sector Sweepstakes

So what does this have to do with sectors? With algorhythmic traders consuming, quantifying, and acting upon big data, the volatility of markets has increased; but larger trends still tend to persist over time, and it’s useful to pay attention to them, too. For weeks now, we have noticed and highlighted the emerging strength of Information Technology. Info Tech has emerged as the titan sector over the past three months with a nearly +11% performance, even though Info Tech didn’t do much as a sector last week:

Standard and Poor's 500 Daily Sector Indices Changes Table

Energy was the winner last week as the volatility in that sector continues:

Standard and Poor's 500 Weekly Sector Indices Changes Table

While Info Tech has risen nearly 11% in the past three months, Health Care and Telecom are not far behind with respective performances of +7.57 and 7.01%. It is also worth noting, that while Utilities was the dominant sector for months coming out of mid-February, we see it is the clear laggard since mid-May.

Standard and Poor's 500 Quarterly Sector Indices Changes Table

For the last nine months, Telecom, Utilities, and Consumer Staples were the top three dominant sectors, giving context to how defensively this rally began. These sectors were beneficiaries of safety seekers, while now we see strength in Tech, Health Care, Telecom, Industrials, and Materials. Should this trend continue, it would be healthy for the continuation of this bull market.

Despite some respite recently, Financials is the loser of the last nine months. It is interesting to note that at the end of August REITs get their own sector. Strength in financials has been in REITs while weakness was concentrated in banks. This divergence may become more apparent with the birth of the 11th sector.

Standard and Poor's 500 Nine Month Sector Indices Changes Table

As the proliferation of big data invades the market place, the fundamental aim of investing has not (and most likely will never) change: Make money. The availability and analysis of data may be changing the landscape, but they are merely tools in assisting us mere humans in our pursuit of winning - for now.

Nikos Kazantzakis wrote, “Since we cannot change reality, let us change the eyes which see reality.” That seems to be a very fitting mantra for the growing dominance of big data in the markets and everyday life.

Agent Smith Image

A Look Ahead:

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

The Slowly Disappearing Market of Stocks

by Louis Navellier

According to the latest FactSet Buyback Quarterly (June 23, 2016), quarterly buy-backs surged 15.1% year-over-year (and 15.6% from the previous quarter) from February 1 to April 30, amounting to $166.3 billion in share purchases, a new post-recession high for quarterly buy-backs in the S&P 500.  Over 40 companies spent at least $1 billion in share buy-backs in the most recently available quarter, the second-best total ever.

Corporate stock buy-backs typically pick up as the earnings announcement season winds down, and this trend should be especially strong this time around as the current low interest rate environment is fueling record August debt issuance, which in turn could result in record stock buy-backs in the upcoming weeks. This should help the stock market continue to meander higher as the inventory of available shares shrinks.

The global demand for corporate or government bonds with a positive yield remains relentless.  There was strong demand for new Treasury securities last week with a bid-to-cover ratio of almost 3 to 1 at some Treasury note auctions.  As a result, market forces are still putting downward pressure on interest rates.

Speaking of corporate and government bonds, the Bank of England had a rude awakening last week when it could not buy back as many low-yielding government bonds as it wanted via quantitative easing.  Last Tuesday, the Bank of England tried to buy as much as 1.17 billion pounds ($1.52 billion) of government debt that would mature in 15 years, but they fell short of their goal.  The 10-year British gilt (bond) now yields only 0.527%, while the 10-year German bond now has a negative yield of -0.17%.  As a result, the Bank of England may have to resort to buying more corporate bonds, which it is now authorized to do, which in turn might just push bond yields even lower in this amazing worldwide limbo contest.

Why Rates Will Likely Stay Low – Encouraging More Buy-backs

Bryan Perry already covered the flat retail sales data, above, but there are several more indicators on the Fed’s “dashboard” which point to the likelihood of no rate increases before December at the earliest.

One new problem emerged last Tuesday when the Labor Department reported that productivity declined 0.5% last quarter, the third straight quarterly decline in productivity, even though economists had expected a 0.3% rise.  In the past 12 months, productivity has declined 0.4%, the first annual productivity decline since the second quarter of 2013.  Meanwhile, U.S. output of goods and services rose 1.2% in the second quarter, while hours worked rose 1.8%, a combination which contributed to the productivity decline.

Productive Workers Image

In general, low productivity tends to be good for new job creation but bad for wage growth, since operating margins are being squeezed.  The Fed watches the wage growth rate very closely.  As a result, the Fed may cite weak productivity figures as an excuse to postpone any key interest rate hikes.  Fed watchers will be scrutinizing Janet Yellen’s Jackson Hole speech on August 26th for hints of any policy change.

The Fed also looks for signs of inflation, and there are none.  As evidence, the Labor Department reported last Friday that the Producer Price Index (PPI) declined 0.4% in July, its largest monthly decline since last September.  Excluding food and energy, the core PPI declined 0.3%, so it was not just falling because wholesale gasoline prices were down.  Lower beef prices were actually more influential than low energy prices on the PPI.  The July wholesale price drop was truly a big surprise, since economists were estimating that the PPI and core PPI would rise 0.1% and 0.2%, respectively.  In the past 12 months, the PPI has risen only 0.8%, so there is no inflationary pressure for the Fed to fight by raising interest rates.

As crude oil prices continue to decline, fears of worldwide deflation are now spreading.  It will be interesting to see how the Fed responds to these growing deflationary fears, but it is increasingly apparent that it will be hard for any central bank to raise key interest rates in the face of rising deflation risk.

In the meantime, negative yields and a lack of confidence in central banks continue to drive investors to gold.  On Thursday, the World Gold Council announced that the investment demand for gold reached 1,063.9 metric tons in the first six months of 2016, up 16% from the same period last year.  Including jewelry, demand for gold reached 2,335 metric tons in the first half of 2016.  Investment demand is being driven by strong demand from the gold ETFs, resulting in a 24% gain for gold so far this year.


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.

Marketmail Archives Trade Summary

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.

Marketmail Archives