What Our Clients Are Talking About Behind The Scenes

The S&P 500 had another week of positive gains and notched its first close above 4200 despite institutional investor angst continuing to rise.  Most of the concerns seem to be focused on macro issues and there are plenty of them that are surfacing.  We are keenly aware of the macro backdrop and are monitoring the situation.  With that being said, my proprietary investment process continues to suggest that the landscape for equities remains favorable albeit there will be pauses and pullbacks along the way to higher highs for the benchmark index.  Furthermore, it is noteworthy that my key indicators strongly suggest that my ongoing recommended themes are still intact.  Thus, I continue to view price moves that are contrary to my medium-term views as opportunities. 

When the investment environment gets challenging or “noisy”, investors can be unduly impacted by either headline news or tactical market price action that leads to sub-optimal decision making.  However, if one has a disciplined methodology, it can be critical to help filter out all the potentially confusing cross currents.  My colleagues and I here at FSI have spent over two decades developing objective tools to help investors to identify opportunities, especially when the equity landscape becomes more challenging.  We use analytical techniques that are based on data driven approaches as the foundation for our research and idea generation to help our subscribers stay grounded and properly positioned to take advantage of the dominant trend.

ISSUES

• Macro Macro Macro.  As I have been mentioning since mid-March, nearly all my calls continue to be dominated by macro discussions even for my clients that have historically been more interested in specific stock ideas. 

• The violent nature of the intra-market rotations has many a bit unsettled and are questioning their positioning and base cases. 

• Value managers are nervous and struggling with the large upside stock moves by their favorite value names, while Growth investors are struggling with the weakish price action in their top picks when there has been little to no change in their forward profit outlooks. 

• Concerns and confusion regarding companies that posted good earnings results, but their subsequent performance was disappointing. 

• Sectors where there was the most interest were Financials, Technology, Industrials, and Materials.  On the other side, the proactive inquiries regarding Health Care, Staples, Utilities, and legacy Telecom are close to zero.  Energy gets some interest, but not a lot because most long only investors keep stating that the sector’s weight is less than 4% of their respective benchmarks and not as important to them as the higher weighted areas.
  

SPECIFIC QUESTIONS

• There are some that are saying that the earnings season has not mattered do you agree with that statement?

• Do you have any observations or takeaways from the earnings season, especially the last week when more companies outside of Financials have reported?

• Your tactical indicators have been mainly favorable since their tactical bullish signals from both early March and during the last week in March.  Are they extreme yet and have they rolled over?

QUESTIONS AND MY ANSWERS

There are some that are saying that the earnings season has not mattered do you agree with that statement?

NO, I do not agree.  With no disrespect to anyone who holds this view or made comments that earnings have not mattered, my research would strongly suggest that the earnings season ALWAYS matter to some degree.  With that being said, there are many parts about the earnings season for a company — bottom line profits, top line revenues, operating margins, order backlogs, inventory levels, as well as what kind of forward guidance that management may or may not provide.  To make things even more complicated, the trend of expectations going into the report as well as a respective stock’s performance can also contribute to how the name performs subsequent to it reporting its quarterly results. 

The current earnings season has had a lot of cross currents, including a macro backdrop that appears to be frequently changing, especially to more tactical accounts.  My analysis shows that not much has actually changed from what we have been discussing and forecasting since the start of the year.  The U.S. and global economies are set to begin reopening albeit at different degrees and timing.  We are in the midst of a major corporate profits recovery and the unprecedented monetary and fiscal policies are still currently in place for the time being.  Stay the course and keep an eye on the bigger picture. 

Do you have any observations or takeaways from the earnings season, especially the last week when more companies outside of Financials have reported?

YES, one thing clearly stands out to me.  In my opinion, the most interesting observation comes from within the Value/Cyclicals/Recovery/Reflation bucket of names.  When looking at my analysis, I see a clear bifurcation between the sub-sets within the bigger grouping — 1) Industrials/Commodity related and 2) Consumer areas that include the travel/vacation/lodging/restaurant/retailers. 

In group one, most names that have reported during this earnings season typically posted good results both relative to expectations and on an absolute basis, had good pricing power/margins/orders, and provided constructive guidance.  The individual names in these groups saw their stock prices and relative performances be quite positive.  So, in my vocabulary, they not only have gone through their less bad periods but have also strengthened to good.     

Group two has been quite different.  They also generally posted good results relative to expectations, but NOT necessarily strong absolute results, many missed narrowly on revenues, and gave less optimistic guidance.  In our view, this was not a huge surprise as this bucket has not seen activity levels reaccelerate meaningfully yet.  Clearly, these names are less bad relative to where their respective expectations were 3-6months ago, but the pace of the economic reopening has only just started. 

With these names entering into the earnings reporting season tactically extended after their impressive rallies off the March lows, it is our view that tactical investors were just not impressed by the continuation of “less bad” when they wanted outright good.  Based on my historical research, it is not uncommon for a contrarian recovery play to have periods of surging stock prices and countertrend pullbacks while its earnings revisions are evolving from less bad to good.  Hence, I am viewing post earnings result stock price weakness as buying opportunities as their ASM trends are still positively sloped and supporting ongoing outperformance.  

Bottomline:  group two’s outperformance is NOT finished based on my work. 

Your tactical indicators have been mainly favorable since their tactical bullish signals from both early March and during the last week in March.  Are they extreme yet and have they rolled over?

NO and NO.  Once again, questioning was frequent this past week.  My key aggressive tactical indicators — HALO, HALO-2, and V-squared (see explanations at the end of the note) — are still all favorable and strengthening, and importantly are still NOT extreme.  I am on alert for the tactical warning sign, but it still has not appeared.

This week we did our big monthly deep dive into the entire 4000 U.S. stock universe that we analyze using my proprietary single stock quantitative selection model, where the most important factor is a measure of earnings estimate revisions that I call Analyst Sentiment Measure (ASM).

Since there are so many interesting and actionable names being identified by my work, I am going to provide a special behind the scenes look this week to our subscribers, which we normally do not do.  With that being said, I am including a link below that includes all of the favorables that are above $2.5B within the U.S that we provided to our institutional investors earlier this week. 

Please note that just because an individual name is positive in the model it does NOT necessarily mean that it is a buy at that exact moment.  Indeed, there are additional factors that would also contribute towards a conclusion that a single stock name is an actionable idea. 

Also, we are excited to share with our subscribers that we will be releasing our new FSI single stock product in the near future.  The stocks that we will be flagging will be based on the analysis provided by my single stock quantitative stock selection model that I call ERM.  So, be on the lookout for our announcement. 

Fundstrat Global Portfolio Strategy – Estimate Revision Model – Positive Rated Names

Bottom line:  As I have been stating, my work still firmly recommends that investors STAY THE COURSE in spite of the growing unease from the institutional crowd as we continue to expect the U.S. equity market to climb the “Wall of Worry”.  My key themes of higher markets, Value/Cyclicals over Growth/FAANG, and SMid over large remain intact.  Moreover, I continue to reiterate that there remains a decent probability that there will be bouts of volatility and headline risk over the next several of weeks.  Consequently, I am still advising that investors 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.

Additionally, my key indicators continue to indicate that as we keep moving into the Summer months that the likelihood of the broad-based reopening of the domestic economy rises each day.  Indeed, this definitive shift towards recovery underpins my view that as there are more signs of normalization that the tailwinds ongoing equity market rally should further strengthen.  I fervently urge that investors stay disciplined and focused on the bigger picture and not the day-to-day market action so one can keep benefiting from the favorable backdrop for equities.

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

HALO = The proprietary Fundstrat Portfolio Strategy Halo Model is a multi-factor model that attempts to predict the forward 1 – 6 month relative performance of a group.  The goal is to help both strategic accounts better time their implementation strategies that would be consistent with our more strategic conclusions derived by our sector/sub-industry 8-panels as well as our stock specific Estimate Revisions Model (ERM), and to generate tactical ideas for aggressive trading accounts. 

HALO-2 = The proprietary Fundstrat Portfolio Strategy HALO-2 Model is the raw tactical data behind our standard HALO multi-factor model described on the previous page.  It is useful for identifying aggressive tactical trading bottoms for the S&P 500.   

V-squared = The proprietary Fundstrat Portfolio Strategy V-squared indicator at its lowest level shows the ratio of VXV (the 3-month CBOE S&P 500 Volatility Index) and the VIX (the 1-month CBOE S&P 500 Volatility Index).  This tool is also useful for identifying aggressive tactical trading bottoms for the S&P 500.