Nowhere to Hide

There was Nowhere to Hide in the Recent Correction

by Louis Navellier

February 13, 2018

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Despite the market’s 10% decline through the close last Thursday, I was encouraged by wave after wave of stunning sales and earnings announcements, especially NVIDIA’s big sales and earnings surprise at the close last Thursday.  Unfortunately, as our friends at Bespoke Investment Group show (in their B.I.G. Tips, “Decile Analysis of the Selloff,” February 6, 2018), there was nowhere to hide during the first big 1,175-point sell-off last Monday.  Virtually every category of stock was slaughtered.  As of February 5, the S&P was down 8.15% in just six trading days, but Bespoke calculated the following morning that all 80 market deciles (eight market categories with 10 deciles each) were down between 7% and 10% each!

Although a new 2018 intraday low for the S&P 500 was made on Friday afternoon, the fact that there was decent trading volume to the upside when the overall stock market reversed was very encouraging.  More retests are likely this week, but as long as trading volume and volatility diminish, it will be a sign that the selling pressure is abating.  The next option expiration day will be Friday, February 23.  That will likely be a pivotal date, due to the fact that failed portfolio insurance has exacerbated the current sell-off. (Please note: Louie Navellier does currently hold a position in NVIDIA Corporation in Mutual Funds and Navellier & Associates currently own a position in NVIDIA Corporation for client portfolios.)

In This Issue

It’s been a rough two weeks.  We saw something like this coming, but not this fast and this deep.  Now what?  Bryan Perry says, “Look to the Fed” and the bond market for more clues.  Gary Alexander sees a new buying opportunity while many are selling. Ivan Martchev sees three major reasons for the sell-off with the Fed’s “QT” operations posing an ongoing threat.  Then Jason Bodner takes a skeptical look at the sham of “portfolio insurance,” and computerized trading, which takes the reins of the market out of the hands of rational investors – at least until the selling pressure is finally exhausted.  In the end, I’ll explain why leveraged options products can whipsaw the market, even while the fundamentals remain positive.

Income Mail:
Look No Further Than Future Fed Policy Data for Market Direction
by Bryan Perry
The Conundrum of the Bond Market versus the Fed

Growth Mail:
Thank You, Robo-Traders, For This Buying Opportunity
by Gary Alexander
It’s a Great Time to Buy – But Too Many are Selling!

Global Mail:
When Skynet Takes Over the Stock Market
by Ivan Martchev
Three Contributions to the Recent Correction

Sector Spotlight:
What’s Behind This Market Contagion?
by Jason Bodner
When Will It Be Over? And Which Sectors are Best?

A Look Ahead:
Failed “Portfolio Insurance” Strikes Again
by Louis Navellier
Earnings and Economic News Support a Higher Stock Market

Income Mail:

*All content of "Income Mail" represents the opinion of Bryan Perry*

Look No Further Than Future Fed Policy Data for Market Direction

by Bryan Perry

Investors have been through a wild ride for the past two weeks and one need look no further than the bond market to see where the trouble lies. Last week saw some notable movement in interest rate spreads as the 2-10 spread spiked higher after spending several weeks near its flattest level in a decade.

The 2-10 spread (the 10-year Treasury rate minus the 2-year rate) expanded by 10 basis points to 69 bps while the 2-30 spread expanded by 13 bps to 96 bps. These moves were fueled by relative weakness in long-dated Treasuries as the market pondered the possibility of an increase in the frequency of rate hikes.

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

The high yield spread also expanded notably, increasing 14 bps to 355 bps. This move took place after the high yield spread touched its lowest level since 2014, fueled by weakness in high yield debt.

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Up until a week ago, the notion of the Fed hiking rates three times during 2018 was well accepted until the now-much-talked-about payroll report came in showing wages on a trend of growing 3.0% annually.

Bond traders are now looking for the Fed to start preparing the market for the possibility of four quarter-point rate hikes for 2018. That would take the current 1.50% Fed Funds Rate to 2.50%. Given the current spread of the 10-year Treasury (2.83%) minus the Fed Funds Rate (1.50%) at 1.33%, it might not be that far of a stretch to think that the 10-year could trade at a yield of 3.5% or higher by year-end.

One report got the ball rolling down this line of thinking on February 3rd, a day after the market-moving payroll report. The Atlanta Federal Reserve’s GDPNow model projected that the gross domestic product (GDP) would increase at a 5.4% annual rate in the first quarter. The last time the economy grew that fast was in the third quarter of 2003! However, as of February 9, some of the sizzle came off that 5.4% figure, as the Atlanta Fed reduced their first-quarter forecast to 4.0%, a more plausible number.

This week will bring inflation data in the form of the Producer Price Index (PPI) and Consumer Price Index (CPI). We’ll also receive data on Retail Sales, Industrial Production, and Consumer Sentiment from the University of Michigan survey. The next set of employment data will be released on March 9, which will help determine if January’s strong bump in wage growth was an anomaly or the beginning of a pattern.

One measure of expected inflation is the five-year five-year (5y5y) forward rate that measures expected inflation. It edged down to 2.24%, but remained near its highest level since November 2014, leading to speculation that the Fed may be tempted to hike rates at a faster pace.

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

Rate hike expectations saw some volatility during the past week. Early in the week, the market briefly pondered the possibility of four rate hikes in 2018, but volatility in equities caused rate hike expectations to pull back. The fed funds futures market sees a 71.9% implied likelihood of a rate hike in March and a 68.9% chance of a second rate hike at the May 2nd FOMC meeting.

TargetRateProbabilities.jpg

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

The Conundrum of the Bond Market versus the Fed

Something doesn’t add up in the latest worldview of the bond market vs. the Fed. First, the bond market dictates to the Fed, not the other way around. If the bond market wants the Fed to raise rates, it will get to a target rate on its own, with or without the Fed, pushing yields up on 2s, 5s, 10s, and 30-yr Treasuries.

The weird thing is that the Fed Funds Futures market is only 72% convinced the Fed will raise in March, not 95%, even though stock markets seems 100% sure that you can stick a fork in a quarter-point March rate increase. This is a real head scratcher, but it may reflect that it’s too early to make a foregone conclusion.

So, we have a conundrum that will surely be settled by the economic calendar over the next few weeks, with the March 9 employment data being the most anticipated metric. What a seismic shift from how the world saw the last meeting Janet Yellen oversaw as Fed Chair. At that gathering on January 30-31, which seems like a lifetime ago, there were no surprises in the latest policy directive from the Federal Open Market Committee (FOMC). The vote to leave the target range for the fed funds rate unchanged at 1.25% to 1.50% was unanimous, sending Fed Chair Yellen into a peaceful retirement on a high note.

Jerome Powell, who was nominated by President Trump and approved by the Senate to assume the Fed Chairmanship, was on the hot seat from day one as he was literally handed a hot potato in the form of an updated change in the language regarding the inflation outlook. What the latest directive said was: “Inflation on a 12-month basis is expected to move up this year to stabilize around the Committee's 2 percent objective over the medium term,” and “Economic activity has been rising at a solid rate.”

The FOMC policy statement was clearly more hawkish. The directive also reiterated that the Committee expects economic conditions to evolve in a manner that will warrant further increases in the fed funds rate. Reading between the lines, that seems like a nice setup for a March rate increase.

Regarding the reaction to this inevitable situation, equity markets responded like they had to digest an extra-hot buffalo wing – it got down the hatch, but not easily; and this is the hand off that the market is going to have to experience over the next few weeks. The market is adjusting to a higher rate of growth and history is on the side of an earnings-driven market under nominal inflationary conditions.

My advice: Stay long.

Growth Mail:

*All content of "Growth Mail" represents the opinion of Gary Alexander*

Thank You, Robo-Traders, For This Buying Opportunity

by Gary Alexander

I have a confession to make. I sail on The Jazz Cruise in the middle of winter each year, so while the market was careening down over the last two weeks, I had the pleasure of listening to artists like Chick Corea on the Blue Note at Sea cruise, and then Arturo Sandoval and The New York Voices on the Jazz Cruise. Still, I paid exorbitant at-sea internet fees to keep researching market news in the Caribbean.

It wasn’t like we didn’t see this big correction coming. We almost telegraphed it to you in advance. In the January 23 Market Mail we wrote“All our authors believe the market is overdue for a pause of some sort. Stocks can’t soar this far, this fast, without a breather.” The next week, on the market’s peak day, we wrote, “Even though the market continues to soar, our authors are still concerned about the market’s overbought condition leading to a potential correction. We remain fully invested but keep our eyes out for dangerous sectors…. When this market corrects is anyone’s guess.”

In my last three editions of Growth Mail, we have also warned of a coming correction in no uncertain terms.  In the January 23 edition, titled “Market Milestones are Falling – Maybe Too Fast,” I reviewed the rapid piercing of 23,000 through 26,000 on the Dow, saying, “Whoa Nellie! Maybe it’s time for a breather!” Then, I compared the recent surge to 1986-87, when the Dow shot up from 1,800 to 2,700 in rapid order:

“The Dow began rising rapidly in late 1986 based on a historically important new tax cut bill (sound familiar?)  The Dow shot up by an unsustainable 50% in nine months, closing at 2722 on August 25, 1987.… Are we finally overdue for a more normal 7% to 10% correction after such a sharp rise? (Answer: Yup!) Readers of this column know how perma-bullish I am, but I am concerned that the Investor Intelligence Bull/Bear ratio just soared from 4.07 to 4.77 in the first full week of January – to the highest reading since March 1987.”

– From Growth Mail, January 23, 2018 – three days before the market peak

If you subtract an ending digit, the Dow’s rise from 18,322 on Election Day 2016 to 26,616 on January 26, 2018 (+45% in less than 15 months) is similar to the rise from 1830 to 2722 in 1986-87. This is not to say that we have another long way to go until the bottom, but there is a similarity in the causes of these two market panics. It seems that the “computer cowboys” are at it again – just like they were in 1987.

In 1987, it was “portfolio insurance” that caused stocks to plunge on Black Monday, October 19. The same is true this time around. Steven Pearlstein, business editor of the Washington Post, wrote last Wednesday (in “Robots vs. Robots trading that has hijacked the stock market”) that half the trading these days is done by computers, “according to complex algorithms that focus on changes in market prices or indexes caused by the trading done by other computers. In this kind of robots vs. robots trading with its circular logic, fundamentals are irrelevant, the volumes are enormous and the holding periods are often a matter of minutes, or even seconds.” He reported one theory about Monday’s 1,175-point plunge in the Dow had to do with “a trade that shorted an ETF tied to a volatility index, which forced the sponsor of the ETF, Credit Suisse, to buy some huge number of futures contracts to balance out its exposure.”

In 1987, there was also a new Fed Chairman (Alan Greenspan) who panicked in his first month in office by raising rates, making the decline a lot worse. We’ll see if the rookie Chairman, Jerome Powell, can learn from history and perhaps postpone the March rate cut until the stock market finds firmer footing.

It’s a Great Time to Buy – But Too Many are Selling!

The last two weeks comprised the fifth 10% or greater correction in this bull market, along with two more that came in at 9.8% and 9.9%. The worst (-19.4%) came in August 2011. Two came back-to-back in late 2015. The most recent correction lasted precisely 100 days and took the S&P 500 down 13.3%. It ran from November 3, 2015 through February 11, 2016, when the S&P 500 bottomed at 1829.08.

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

The key factor in all of these corrections was that the bottom provided investors with a great time to buy. Since the bottom of February 11, 2016, the S&P is up 43.2%, even including the recent 10% correction.

But investors don’t buy during a crash, do they? They typically sell. According to a Bloomberg article last Wednesday (“Retirement Savers Fled Equities in Market Selloff,” by Suzanne Woolley, February 7):

“Retirement savers violated a cardinal rule of investing this past week: they sold into a plunging market. After racing into equities in January, they did an about-face as markets fell on Friday February 2. Savers moved into money and fixed-income funds, trading at close to three times the norm, according to Alight Solutions’ 401(k) Index. On Monday, when the Dow Jones Industrial Average plummeted 1,175 points, they repeated the pattern, this time trading at 12 times the typical pace. The next day, as the market recovered some losses, 401(k) savers kept selling stocks, trading at a rate of four times the usual. The last time trading reached 12 times the norm was on Aug. 8, 2011, when markets dropped on concerns about a global debt crisis.”

There are many problems with selling during a panic. First, if you use a “market order” in a selling panic, you may not get a bid, so your actual sale price could be shockingly low. Second, you may have to pay short-term capital gains taxes. But even if you sell in a tax-free account, the biggest problem is deciding when to get back in. Markets tend to bounce back fast and human nature keeps us from buying back in at a higher price than where we sold, so we wait for another major correction, which may not happen soon.

Using data from Morningstar and Prudential Investments for the S&P 500 stock index from December 1996 to December 2015, the average annual return was 8.19%, but if you missed the 20 best days (out of 5040 trading days) your return fell to an average annual rate of just 2.05%. And if you missed the 30 best days you lost out entirely. The average annual rate of return fell to a minus 0.04%.

There are many reasons to stay invested. Earnings are strong and getting stronger. Global growth is high and rising. The tax structure is giving businesses and employment a boost and inflation is still contained.  Markets can go crazy from time to time, but the market has recovered after every previous correction.

Global Mail:

*All content of "Global Mail" represents the opinion of Ivan Martchev*

When Skynet Takes Over the Stock Market

by Ivan Martchev

Skynet is a fictional neural net-based conscious group mind and artificial general intelligence system that features centrally in the Terminator franchise and serves as the franchise's main and true antagonist.

-- Wikipedia

When the Fed did QE, it in effect dominated the Treasury auctions and suppressed long-term interest rates as well as bond and stock market volatility. When the Fed reversed QE and started quantitative tightening (QT), it in effect reversed its short volatility position in the bond market, which also affects stock market volatility. Discussing this scenario in my January 11 column, I ended with this comment and question:

“Well, the time to sell [bonds from the Fed’s balance sheet] is now. The Fed is in effect unloading its short volatility position on the market in 2018. What do you think will happen to stock and bond volatility this year in that scenario?”

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

I am not saying this was a prediction of the fastest explosion in stock market volatility in history, but I am suggesting that I am not surprised by the developments over the past week. Still, I think it is overly-simplistic to think that there is one root cause for this mess. Here are three reasons that come to mind.

(1) Records Inflows into Stocks in January

January is typically a strong month over longer periods of time due to the tendency for a lot of pension funds and other institutional money to enter the market. This year was no different as equity funds have enjoyed their biggest monthly inflows on record, attracting about $102.6 billion in January, according to EPFR. January’s total came in well above the previous record haul of $77 billion in January 2013. This gush of money caused the stock market to experience its best January returns since 1987.

When so much money enters the stock market, it is not surprising that it became the “most overbought” market on record, as defined by more than one popular technical indicator. The trouble is the inflow rate slowed down in February, creating an air pocket under the market. It is no surprise that February is an exceptionally weak month if one looks at historical data over longer periods of time, like 50 years. This year February has been much weaker – and it is far from over yet – because the air pocket under the market was much bigger, courtesy of the record inflows into stocks in January.

(2) Computers and Leverage

Those that are worried that Skynet (of Terminator series fame) has conquered financial markets are urged to read Flash Boys by Michael Lewis, describing the proliferation of high-frequency trading. I do think that the speed of the decline over the past week was driven by computers trading with other computers on high amounts of leverage. High frequency trading routinely surpasses 50% of volume on most stock exchanges and, judging by the speed of many of last week's moves, it may have been higher.

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The 1987 crash in the stock market was blamed on “portfolio insurance,” a form of computerized trading in which the lower the stock market went, the more the computer programs sold into the lower move, which created a quick avalanche effect. Some of last week's moves felt like small avalanches, like this:

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

(3) The Effect of (Short) Volatility ETFs

The exchange traded product (ETP) space is over $3 trillion. As that space has grown, so has the use of computerized trading that helps manage ETP securities. Much of the blame over the past week has been put on short volatility ETFs, which among other things take short positions in front-month VIX futures.

The expulsion of stock market volatility causes those ETPs to reverse their short VIX futures positions, causing a record surge in VIX futures buy orders after-hours, when such ETPs typically square their positions. On the day the Dow Jones Industrials closed down 1175 points, a surge in VIX futures buy orders created a surge in S&P futures sell orders as they are inversely correlated. Because of the record buying of VIX futures, their prices rose quickly after-hours, which caused many ETPs whose portfolios are short VIX futures to suffer record 80%-+ declines after-hours, in effect blowing up their portfolios.

While most of the assets in short-volatility ETFs have already been liquidated over the past week, there are still over $3 trillion in assets in all ETPs, so I am sorry to say that Skynet is still lurking in the stock market. It looks to me like the regulators allowed a monster to grow in the face of the ETP industry and they will have a very difficult time reining it in.

While this latest avalanche effect may have been triggered by the air pocket of inflows in stocks in February catalyzed by spiking long-term interest rates, there is likely to be more volatility for the rest of 2018. The Fed is slated to keep reversing its own “short volatility position” in the bond market by intensifying QT operations so the roller coaster we experienced in January and February may repeat--more than once.

Sector Spotlight:

*All content of "Sector Spotlight" represents the opinion of Jason Bodner*

What’s Behind This Market Contagion?

by Jason Bodner

People often assume that the worst epidemic in history was the Black Plague, which took 50 million lives from 1346 to 1350. That was horrible, but the Plague of Justinian (541-542) holds the dubious distinction of claiming the most lives (up to 100 million) of any epidemic. It spread so quickly because it was carried by rodents whose fleas were infected with the bacteria. The rats traveled worldwide on ships and spread the bacteria from China to North Africa and the Mediterranean. It actually weakened the Byzantine Empire with thousands dying daily. Contagions happen quickly and usually come from nowhere.

That sounds something like this equity rout we have all witnessed. The question is, “What’s going on?”

What happened? “Short Vol Positioning” is getting much of the blame. Let me explain what this means:

A lot of hedge funds and even some mutual funds have had positions that were sold to them as “insurance” against a downdraft. Volatility is the measure of an asset’s expected or historic price movement over time. The more movement away from the historic levels, the more change in volatility.  It’s no secret that the market has had historically low volatility for quite some time during this massive run-up. So, selling volatility to buy it back lower has been the trade-du-jour for quite a while.

Here’s the thing: Shorting volatility is not insurance! It’s adding more risk! It is really squeezing extra basis points of return trying to keep pace with a super-strong stock market. It’s a lot like selling low delta (probability) puts on a long stock portfolio. Investors happily buy stocks going up and sell volatility to earn premium to try to keep pace with the market or outperform it. When the first real sign of selling came, the algo’s pounced, sending stocks lower. Volatility exploded upward, but way more than normal.

Why? Shorting VXX was a great trade for 9 years (chart below, right) while selling VIX has been fruitful for a few years. When volatility is not just a measure of price action, but actually is traded like an asset itself, shorts need to cover when it goes the wrong way against them. They buy back these shorted products like VIX (+175%, 2/1-2/3) and sell their long inverse products like XIV (-96%, 2/1-2/8).

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

On a 3-4% pullback from equity market highs, the VIX should not have exploded to 50 (intraday 2/6), but it did. This was due to a few factors:

  • Short-covering
  • Selling pressure on stocks and indexes
  • Big Banks (dealers) know this wrong-way positioning of the street and skew markets to make more money, further amplifying the dislocations and the need to cover exposure.
  • Margin calls require raising cash by selling liquid securities = selling stocks.

I initially thought that even the most aggressive estimates put assets in these funds and vehicles at $50 billion – but the market cap on the S&P 500 was nearly $8 trillion, so what effect could it really have?  Then I remembered that as of late December just five stocks accounted for over 12% of the market cap of the S&P. That’s right: Facebook (FB), Berkshire Hathaway (BRK.B), Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT), of which I hold no position, accounted for 12.3 % of the S&P 500. As liquidation requirements to raise cash put pressure on major stocks that pressured the index itself. Other indexes started cascading down, followed by global indexes. America had a cold and the world caught the flu.(Please note: Navellier & Associates currently own a position in Facebook (FB), Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT) for any client portfolios but does not own a position in Berkshire Hathaway (BRK.B))

I believe these products were not protective but a manifestation of greed – of trying to keep pace with a heated equity market, itself partly fueled by this cycle of buying stock and selling volatility.

This is just like a gun going off in a movie theater: No one expects it and everyone rushes for the exits.

When Will It Be Over?

We all know the sell-off will subside but where are we in the cycle? According to the latest American Association of Individual Investors (AAII) survey, Bullish sentiment is at 37%, just below the historical average of 38.5%, and bearish sentiment is at 35%, just above the historical average of 30.5%.

Even though AAII says, “Pessimism rose to a three-month high,” and “Optimism fell to a two-month low,” AAII also says, “Both are within their typical historical ranges.” Meanwhile, all of the major averages – the DJIA, S&P 500, Nasdaq Composite, and Russell 2000 – have plunged below their 50-Day and 100-Day moving averages. As of last Friday, only the Russell 2000 has broken below the 200 Day MA. This means the pain has been particularly focused in the small-cap stocks.

TheMajorAverages.jpg

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

Which Sectors are Best?

Every sector has seen a drawdown and all of them have seen the number of stocks above their 50-day moving averages fall off a cliff. The most punished sectors, according to Bespoke, are Utilities with 0% (trading above their 50-day moving average), Materials with 8%, and Energy with 16%. Consumer Discretionary is still the strongest sector in this regard with 55% of their stocks above the 50-day MA.

The S&P 500 Index currently has only 32% of its stocks above the 50-day contrasted with 80% just two weeks ago. The S&P 500’s 12-month trailing P/E has also dropped below its 50-day to 21.74 from 23.5.

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The takeaway here is that even with a rate forecast change reshuffling positioning and a short volatility squeeze, the fundamental backdrop for stocks is terrific. The global economy is great, sales and earnings are terrific, labor markets look strong, and confidence is still relatively high. We are having a stellar sales and earnings season with the best forward guidance in history. Have we hit bottom? This sell-off was started by being overbought, which triggered technical selling. This caused algo’s to gear the fall at a quicker pace, which caused mechanics to get broken (volatility products: VIX, XIV, VXX, etc.).

I believe short-term we will see more pain. MAP has an institutional overbought and oversold indicator.  The ratio measures the sustainability of buying. January 24th MAP said the market was overbought because the ratio popped above 80%. In order for the market to be oversold the ratio of buying needs to be below 25%. Historically MAP is very accurate with forward returns of the market being lower after overbought signals and higher after oversold signals. The ratio currently only fell to 64.5%. By MAP’s measure we are still a way off from being oversold.

MapItRatio.jpg

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

When the flush out is complete the indexes will stabilize and volatility will subside. That is the ideal time to buy stocks, which were unfairly punished in a rush for liquidity. That is the opportunity in all of this. The play is to sit tight and have a shopping list ready to buy beaten down leaders.

The pain of the sell-off will subside, and there is still really no other place to put your money than equities. The fundamental picture is great and this technical and mechanical sell-off will subside soon. Deals will be abundant. Winston Churchill reminded us that “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

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A Look Ahead:

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

Failed “Portfolio Insurance” Strikes Again

by Louis Navellier

Unfortunately, last week reminded me of October 1987, when portfolio insurance tied to option contracts failed. Portfolio insurance in risk-parity products seems to be a major catalyst behind the sharp sell-offs last week.  Specifically, The Wall Street Journal reported on Tuesday that trading was halted in a volatility-themed ETF called the VelocityShare Daily Inverse VIX Short Term (XIV), an exchange traded note (ETN) that may be liquidated.  There is approximately $4 billion in these kinky ETFs, according to WSJ.

Wells Fargo is reported to be willing to restitute clients for losses in XIV.  It will be interesting if other brokerage firms will subsequently follow and restitute losses in failed portfolio insurance products.  Since these kinky ETFs tend to be tied to big companies in the S&P 500, there has been forced selling of options and futures contracts in the S&P 500 as these portfolio insurance products systematically failed.

CNBC’s Jim Cramer agrees with my assessment and, in his usual over-the-top manner, he became a little unhinged on air last week about the “complete morons” who caused the forced liquidation on Thursday. You can check the videotape of his rant, if you wish.  He became very upset with the systematic selling from failed portfolio insurance products, especially during his emotional commentary last Thursday.

Complicating matters further, more leveraged option products designed to protect investors continue to blow, like LJM Preservation and Growth Fund(LJMIX).  So, until all the option and futures products designed to protect investors are liquidated, the S&P 500 could continue to flounder.  On any subsequent retests of recent lows, we want to see trading volume dry up, which means selling pressure is exhausted.

Earnings and Economic News Support a Higher Stock Market

Here’s another, more positive, parallel to 1987.  Earnings and the economy are doing fine.  There was no fundamental justification for the crash of 1987, and there is no justification for a further decline in the market now.  What we have seen so far is a “normal” 10% profit-taking correction.  Any further decline frankly depends on the robo-advisors and their computer algorithms, over which we have no control.

ServicesSector.jpg

Fortunately, the economic news last week continued to be very positive.  On Monday, the Institute of Supply Management (ISM) announced that its service sector index rose to 59.9 in January, up from 56 in December.  This is the highest reading ever for the ISM service index (since the records started back in 2008) and it was well above economists’ consensus estimate for 56.5.  I should quickly add that these ISM indexes have been very volatile in recent months, but at least the volatility is to the upside now!

On Tuesday, the Commerce Department reported that the volume of trade increased by nearly $10 billion in December (+2.2%).  Exports rose 1.8% to $203.4 billion, while imports surged 2.5% to a record $256.5 billion.  There is no doubt that surging electronics imports, led by the iPhone X, caused imports from China to surge 28.2% in 2017 to a record of $375.2 billion.  Imports from Mexico rose 6.7% in 2017 to a record $71.1 billion.  For all of 2017, the U.S. established a record trade deficit of $566 billion. This tends to put a damper on GDP growth, but it is a sign of America’s affluence to be able to afford more imports.

In summary, the economic news is positive.  The underlying earnings environment is strong and getting even stronger.  The real problem is that the stock market really did get ahead of itself in January and the failure of portfolio insurance in risk-parity products triggered a violent sell-off on Friday, February 2 and Monday, February 5, with a retest on Thursday, February 9.  More retests are likely, but hopefully volume will continue to dry up on the downside and signal that selling pressure is being exhausted.  Additionally, hopefully all of the failed portfolio insurance options and futures products will soon be liquidated by options expiration day next Friday, February 23rd, since they are needlessly jerking the S&P 500 around!


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 Blue Chip Growth, Louis Navellier’s Emerging Growth, Louis Navellier’s Ultimate Growth, and Louis Navellier’s Family Trust, 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. 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. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. As noted above, there are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC, newsletter portfolios. In most cases, Navellier’s Investment Products have materially lower performance results than the InvestorPlace Media, LLC newsletter portfolios and advertising materials claim to have. The InvestorPlace Media, LLC newsletters and advertising materials typically contain performance claims that can significantly overstate the performance results compared to actual results for similar Navellier Products.

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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