Rotational Buying
I believe what we are seeing is rotational allocation and money moving out of commodities. In the middle of 2005 money left real estate and moved into the brave new world of commodity investing and emerging markets. That fueled a blow off rally into metals, oil and emerging markets in late 2005 and early 2006. As those markets peaked, money was dumped en masse in May and June. The selling pressure was higher than anything we've seen this cycle by a large amount. As I posted repeatedly, that was when I believe those stocks should have been sold. So, where does that money go? It rotates into the unloved large cap and large cap tech stocks as well as perceived defensive sectors.
So, the rally over the past few months, if you can call it that, was being driven at some point by a handful of explosive moves in the SMH. We are now entering the fourth week of September and what is the return for SMH this month? Zero. How about the utilities? They were moving hard a few months ago. Now where are they? The return over the last two months? Zero. If you bought a month ago when people were telling you they were bullish on utilities? You are down 4% per the Dow Jones Utility Index. How about the defensive consumer staples sector? Again, for the month of September the return is negative. For the past few months the return is about 2%.
Transports aren't working. Cyclicals peaked in May and aren't anywhere near their peak. Homebuilders are down significantly. Semiconductors are in a bear market and have been for three years as defined by the SMH. Banking hasn't moved at all. Energy is cratering. Small caps are underperforming. Some energy stocks have been destroyed. Commodity stocks are down significantly. Late state industrials are down significantly. Retail made a massive move in weeks after cratering post May and appears to be topping. Yet, the S&P and Dow are near multi-year highs.
The moral of the story? First, look for divergences in sentiment not the level of sentiment. Negative sentiment near major highs is not typically constructive. Second, the rotation is likely nearing completion. Big caps usually outperform as we approach times of higher risk and the narrowly weighted S&P and Dow are safe bets. If and when markets actually turn into an outright bear, well, that's another story. We have a stealth bear market right now in most sectors and these violent rallies are indicative of an unhealthy market. The returns most people are seeing on their broker statements are likely not reflective of the S&P at a new high. The rally is narrowing as fast money moves into increasingly narrow niches of what is working. Eventually, the probabilities are nothing will work and fast money will pay the piper or depart the markets.
Could it turn out differently? Well, of course. It's all about probabilities and risk management. If the Amaranth hedge fund would have listened to me, I could have saved them $5 billion dollars. And, I would have helped them for free. All they needed to do was read my blog. No, I'm not being narcissistic. I am joking. Hey, Amaranth? Would you have paid me a 10% retainer? $500 million? I'd start my own hedge fund and give all proceeds to children's charities.
So, the rally over the past few months, if you can call it that, was being driven at some point by a handful of explosive moves in the SMH. We are now entering the fourth week of September and what is the return for SMH this month? Zero. How about the utilities? They were moving hard a few months ago. Now where are they? The return over the last two months? Zero. If you bought a month ago when people were telling you they were bullish on utilities? You are down 4% per the Dow Jones Utility Index. How about the defensive consumer staples sector? Again, for the month of September the return is negative. For the past few months the return is about 2%.
Transports aren't working. Cyclicals peaked in May and aren't anywhere near their peak. Homebuilders are down significantly. Semiconductors are in a bear market and have been for three years as defined by the SMH. Banking hasn't moved at all. Energy is cratering. Small caps are underperforming. Some energy stocks have been destroyed. Commodity stocks are down significantly. Late state industrials are down significantly. Retail made a massive move in weeks after cratering post May and appears to be topping. Yet, the S&P and Dow are near multi-year highs.
The moral of the story? First, look for divergences in sentiment not the level of sentiment. Negative sentiment near major highs is not typically constructive. Second, the rotation is likely nearing completion. Big caps usually outperform as we approach times of higher risk and the narrowly weighted S&P and Dow are safe bets. If and when markets actually turn into an outright bear, well, that's another story. We have a stealth bear market right now in most sectors and these violent rallies are indicative of an unhealthy market. The returns most people are seeing on their broker statements are likely not reflective of the S&P at a new high. The rally is narrowing as fast money moves into increasingly narrow niches of what is working. Eventually, the probabilities are nothing will work and fast money will pay the piper or depart the markets.
Could it turn out differently? Well, of course. It's all about probabilities and risk management. If the Amaranth hedge fund would have listened to me, I could have saved them $5 billion dollars. And, I would have helped them for free. All they needed to do was read my blog. No, I'm not being narcissistic. I am joking. Hey, Amaranth? Would you have paid me a 10% retainer? $500 million? I'd start my own hedge fund and give all proceeds to children's charities.
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