What Our Clients Are Talking About Behind The Scenes

The market/sector volatility continued over the week as the S&P 500 having both fallen over 2% and then rising nearly 3% to near an all-time high.  The headline news continues to contribute to create high levels of uncertainty and worry, which has made the investing backdrop difficult even for the most seasoned professional.  When one does not have a disciplined process to depend on, an investor can become a flag during a windy day being impacted by the direction of the day’s gust.  At FSI, we use disciplined, objective, and data driven approaches to our research and idea generation to help our subscribers not let their emotions or the news story of the day lead to less-than-optimal decision making. 

With that being said, this week’s comments are below, which include the questions and issues that were brought up the most often in my institutional client meetings, and I will then follow with my responses.

ISSUES/OBSERVATIONS

• The rise in interest rates was replaced this week as the top issue in my meetings, and was replaced by everyone being frustrated, confused, or searching for clarity regarding the equity market over the past week.  In fact, interest rates were not mentioned much at all. 

• Similar to last week, macro discussions were quite frequent and above the norm.  However, this week there was a shift to the economy and the dollar.

• There were a lot of questions and deep probing regarding my conviction level of my medium-term bullish view and preferred positioning. 

• It seemed most had read a bearish thesis from somewhere and are questioning what the upside potential is for the overall U.S. equity market. 

• On that same page, there were concerns that the main trends that we have been discussing, higher markets, Value/Cyclicals over Secular Growth/FAANG, and SMid over Large had run their course and were over, which seem to be coming from other forecasters. 

SPECIFIC QUESTIONS

• Are you still medium-term bullish?

• Have there been any changes in your key indicators to suggest your main themes are finished?Value/Cyclicals over Secular Growth/FAANGSMid over Large

• Is the outperformance in industrial metals stocks and other commodity related equities over with Europe reentering lockdown and the dollar strengthening? 

• Financials was the worst performing sector through Thursday’s close.  Based on your work would you be buying this dip or selling any subsequent rallies? 

• What else jumps out the most to you either sectors, sub-industries, or stocks at the moment? 

MY ANSWERS

Are you still medium-term bullish?

YES, my work remains quite constructive on the U.S. equity market and I have been viewing the challenging March price action opportunistically.  There is little to no evidence in all of my key indicators or my view of the macro landscape to suggest that a major market top is imminent.  

Have there been any changes in your key indicators to suggest your main themes are finished?Value/Cyclicals over Secular Growth/FAANGSMid over Large

NO, there has been zero change in my key earnings revisions data that would suggest that my main themes from above are no longer relevant and that investors should reposition.  What I have seen in my more tactical indicators is that preferred positioning and ideas were tactically extended and extreme on a relative price performance basis, which suggested that pauses/consolidations/counter trend pullbacks could occur.  In my view, these types of moves are healthy and provide investors with a chance to raise exposure.  Importantly, my work is not overly dominated by technical analysis, the macro story of the day, or tactical price movements. Thus, during times like these when there are sharp and sudden reversals in leadership, I find having a disciplined and objective process quite value added in filtering through the noise and increase in volatility.  Thus, my work strongly suggests that using weakness to raise exposure in Value/Cyclicals/Recovery Plays and moving down the cap scale will reward investors with patience and conviction to do so.  

Is the outperformance in industrial metals stocks and other commodity related equities over with Europe reentering lockdown and the dollar strengthening? 

NO, it is my macro view that Europe returning to lockdown had some spillover effects.  First, it brought economic weakness fears back to the forefront for tactical traders.  Second, it weakened the Euro and strengthened the Greenback.  Both of these negatively impacted industrial metals and other commodities, which were relatively overbought and were well in need of some pauses/pullbacks anyway.  It is my view that this Europe issue will be short lived.  The Europeans have been overly dependent on the Astra Zeneca vaccine thus far and there has been a lot of headlines about the production problems that have occurred that has led to sub-par vaccination results in Europe.  Looking ahead, it is our understanding that they will begin receiving their allotments of the Pfizer and Moderna vaccines during 2Q21, and there will likely be a huge ramp up of people getting vaccinated.  Once this occurs, the economic fears will likely recede, and the Euro should relatively strengthen somewhat. 

When looking at my always important earnings revisions work, these areas are still well supported and, in my view, still in the early innings.  Hence, we would be buyers of weakness in industrial metal stocks and commodity equities not only in the U.S, but globally. 

Financials was the worst performing sector through Thursday’s close.  Based on your work would you be buying this dip or selling any subsequent rallies? 

Buying the dip is what my key indicators are suggesting investors should do during this relative weakness in Financials, especially the Banks/Investment Banks/Brokers.  From a macro perspective, we expect the 10-yr U.S. Treasury yield to be flat to down once we move into the early parts of April.  If our view regarding the return of large foreign buyers, mainly Japanese Banks, and asset allocation shifts into fixed income from global sovereign wealth funds and pensions is correct, then the immediate upward drift in 10-yr yields will likely slow and possibly retrace somewhat.  This tactical downward pressure in rates will likely benefit parts of Secular Growth/FAANG and other highfliers while being a short-term headwind for Financials.  In this scenario, we would be a buyer of Financials on relative weakness. 

Interestingly, the earnings revisions for Financials, especially the Banks, remains quite robust.  Therefore, this alone keeps us bullish in the sector and we are advising investors to keep raising exposure.  In last week’s Whispers, we provided some single stock names that my ERM model liked, and they are still favorable this week — the S&P 500 names that stood out the most are WFC, BAC, C, JPM, CMA, MTB, USB, GS, MS, RJF, SCHW, CME, ICE, NDAQ.

What else jumps out the most to you either sectors, sub-industries, or stocks at the moment? 

My earnings revisions work flags some interesting ideas. 

• Energy looks like there is more to come.  There are names widely dispersed from Equipment, Integrated, E&P, Refiners, and MLPs. 

• Materials still has lots of names across the cap spectrum, especially industrial metals, chemicals, and packaging. 

• Industrials, one of the most heterogenous of all the 11 sectors, has a clear bias toward economically sensitive sub-industries/stocks — Building Products, Capital Goods/Machinery, Distributors, and Transportation — and quite broad based across the cap spectrum. 

• Consumer Discretionary is about the return of consumer foot traffic and spending — Restaurants, Retail related, Travel/vacation related, and Autos. 

• Technology’s relative attractiveness still resides in more cyclical areas on an intra-sector basis — Semi Cap Equip, Semi Chips, all the manufacturing related areas, and laggards in Data Processing (MA, V).  Secular growth within Tech looks OK from an absolute basis, so my work does NOT suggest dumping them, but be mindful of your weightings (i.e. have less than years past for now).  

• The defensive areas (Staples, Utilities, Legacy Telecoms) are overall unfavorable on a relative basis, but there are some single stock names that look interesting based on our earnings revision work.