What Our Clients Are Talking About Behind The Scenes

Over the past week, the first trickle of 1Q21 profit reports from several of the key large cap Financials were announced and in my view the results were somewhere between not bad to pretty good, which helped fuel the S&P 500 to end the week at another all-time high; Despite the continued rise in the index, there has been a growing anxiety among institutional investors and a handful of Wall Street Strategists that have turned less optimistic to slightly bearish.

These forecasters are now suggesting that investors begin shifting towards a more defensive posture because they are worried about economic weakness among many concerns.  As I commented last weekend, my work does not support these conclusions and although there could always be small selloffs at any time my research is still signaling higher highs in the overall equity market and that our recommended themes are still intact.  Hence, we continue to view price moves that are contrary to our medium-term views as opportunities.

When trading views suddenly shift like this without underlying support and confirmation by my key indicators, we remind strategic investors to be careful not to get shaken out of their positions as a result of tactical market moves.  I continue to remind subscribers that when one does not have a disciplined process to depend on, they may be overly influenced or more inclined to make emotional decisions based on the headline news or tactical market action.

At FSI, we use disciplined, objective, and data driven approaches which form the foundation for our research and idea generation to help our subscribers stay grounded and properly positioned to take advantage of the dominant trend.

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

• My institutional client calls continue to be dominated by macro discussions. 

• Rising interest rates concerns have now totally disappeared from client discussions. 

• There is a lot of angst among investors, and nearly every client either has concerns, is somewhat confused, or is seeking clarity.  It is my view that strategic long-only managers have shifted to some degree towards Value/Cyclicals/Recovery/Reflation but have more to go.  Hedge funds and tactical accounts have moved away from away quite a bit from our preferred positioning.  Thus, I view this as bullish for Value/Cyclicals/Recovery/Reflation as accounts are broadly mispositioned. 

• Similar to last week, investors are questioning their reopening and recovery positioning as the yield on the 10-yr treasury continues to pull back from its 1.76 peak reached in late March and now stands at 1.57. 

• As IWM, Financials, and Energy remain relatively weak during April, I am still peppered with questions regarding my conviction level regarding my ongoing bullish views and favorable outlooks for Value/Cyclicals over Secular Growth/FAANG, and SMid over Large had run their course and are over, which clearly seems to be coming from the research of other forecasters. 

SPECIFIC QUESTIONS

• The 1Q21 Earnings season is underway any quick thoughts?

• Interest rates had their biggest weekly drop in yields since June 2020, which is still consistent with your forecast that they would fall during the first half of April as you forecasted.  Is this signaling underlying weakness in the U.S. economy and are you concerned that growth may disappoint?

• Are your tactical indicators, which have been flashing bullish signals since the last week of March, still favorable and are they getting extreme yet?

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

• The worst performing Large Cap names for the week were dominated by reopening plays — Airlines, Cruise Lines, and Energy related.  What does your earnings revisions signal for these areas: Buy, Hold, or Sell? 

• Despite reopening plays being weak, the Large Cap leadership board was also dominated by more Cyclical/Value areas — PPG, NVDA, FCX, WFC, MOS, TPR, LOW, AAP — and some Health Care.  What does your research signal for these names?

QUESTIONS AND MY ANSWERS

The 1Q21 Earnings season is underway any quick thoughts?

In my view, the early reports were overall in line with my expectations, which continues to be for robust results that will likely exceed the current consensus expectation for 1Q21 S&P 500 yr/yr growth of nearly 22% by 5-8%.  I reiterate my view that Corporate America has done an impressive job of improving their cost structures that will create significant operating leverage.  Although, there may be a handful of high-profile misses or overly conservative guidance, our research is still pointing to final results that will be quite good and help provide fuel for equity markets to keep moving higher. 

Interest rates had their biggest weekly drop in yields since June 2020, which is still consistent with your forecast that they would fall during the first half of April as you forecasted.  Is this signaling underlying weakness in the U.S. economy and are you concerned that growth may disappoint?

NO and NO.  It remains my view that the sharp rise in 10-yr yields in March was not providing important overheating signals about the U.S economy but was the result of a few specific macro factors.  Importantly, it is also my opinion that the decline in yields that we have seen in April, which I had been forecasting, is not flashing signs of weaker growth.  Thus, once rates have worked off the March increase, my research suggests that 10-yr yields will be heading higher and the rise will likely be a stair step higher not a surging straight line as economic and inflation news ebb and flow for the remainder of the year. 

Are your tactical indicators, which have been flashing bullish signals since the last week of March, still favorable and are they getting extreme yet?

YES and NO.  YES, my key aggressive tactical indicators remain favorable since their last signal during the last week of March.  Importantly, the critical tools — HALO, HALO-2, and V-squared (see explanations at the end of the note) — are NOT extreme as of yet but we continue to remain on alert for a short-term be careful signal. 

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, as we have been stating, there has been zero change in my key earnings revisions data that would suggest that my main themes from above are over and that investors should reposition.  In fact, we are seeing our key indicators beginning to STRENGTHEN and expect even more.  What I am seeing now from my more tactical indicators is that these ideas are simply experiencing healthy consolidation/pullbacks to begin working off tactically extended and extreme relative price performance.  My work strongly suggests that any relative weakness in these areas should be used opportunistically to raise exposures. 

The worst performing Large Cap names for the week were dominated by reopening plays — Airlines, Cruise Lines, and Energy related.  What does your earnings revisions signal for these areas: Buy, Hold, or Sell?

My single-name quantitative stock model that is heavily impacted by my proprietary earnings estimate revisions indicator, which I call Analyst Sentiment Measure, still strongly supports these areas.  Therefore, my work signals that the recent weakness is likely the result of tactically overbought readings within a still supportive and favorable uptrend and suggests that investors should be buyers of dips in these weekly laggards. 

Despite reopening plays being weak, the Large Cap leadership board was also dominated by more Cyclical/Value areas — PPG, NVDA, FCX, WFC, MOS, TPR, LOW, AAP — and some Health Care.  What does your research signal for these names?

Almost all of the leadership names this week were more cyclically oriented and also favorable in my work.  Health Care, as a sector, remains as an underweight based its proprietary 8-panel analysis.  With that being said, there are some single stocks that look quite interesting and all the names that outperformed this past week are favorable in my work.

Bottom line: The U.S. equity market continues to climb the “Wall of Worry”, and my research strongly suggests that investors STAY THE COURSE. As I discussed last week, my main themes of higher markets, Value/Cyclicals over Growth/FAANG, and SMid over large are still intact based on the key indicators in my investment process.

I would also reiterate that there may be some volatility and headline risk over the next couple of weeks as the reporting for Corporate America’s 1Q21 profit announcements start to increase. There is no change to my outlook and recommendation to use relative weakness in the sectors/stocks that my work continues to flag as favorable as opportunities and avoid the areas that have unfavorable indicators.

Importantly, as each day passes, we are moving into the Spring/Summer and the increasing likelihood that the broad country-wide vaccination deployment accelerates and the odds of moving towards the national reopening of the U.S. economy rise each day, which should continue producing tailwinds for the ongoing equity market rally. It’s a time for investors to stay disciplined and keep an eye on where things are going and not the day-to-day wiggles so one can take advantage of a favorable backdrop for equities.

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Definitions of HALO, HALO-2, and V-squared