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Alpha City

Alpha City

Introduction to Wall Street WhispersEvery week I do over twenty idea conference calls with institutional clients from all over the world.  They range from tactical traders to strategic long only portfolio managers.  I literally speak and interact with the best and the brightest that the money management profession has to offer, and it is one of the aspects of my job that I love the most.  During these discussions, the clients are certainly interested in what my research is showing and what my views are on a host of different topics.  Importantly, however, I do not just present to my clients where they passively listen to my conclusions and best ideas.  The time spent is usually more of an active discussion and debate where investors are also sharing with me things they are thinking, worried about, what they own, and what they are thinking about buying and selling.  Sometimes clients agree with my views and at others there is significant pushback.  Because I have so much client engagement, the aggregation of the meetings can provide valuable information back to me about where the dominant thoughts and positioning of the institutional investing crowd are at that moment.  I remember back when I was in graduate school and just a regular retail investor.  I would wonder what it would be like to get a glimpse into what the “pros” were doing and thinking.  Well, going forward, I intend to share on Tuesdays what the professional investors that I speak with are thinking and doing with their portfolios to give our FSI subscribers a peak behind the so-called institutional curtain to help our retail clients.   I hope that you enjoy our new weekly note and would love to hear from you if you are finding it useful in your investment returns.  So, below is this week’s comment and within it you may see some terminology that might be unknown or confusing to you.  Over time, FSI will be creating a glossary of terms/vocabulary areas and some teaching sections, but for now they are still a work in progress.  The S&P 500 continues to linger near all-time highs while many institutional investors and Wall Street forecasters have found several factors to worry about and how they will negatively impact the health of the equity market.  Since mid-March, there seems to be a new reason every couple of weeks — rising interest rates, fears of decelerating growth, and warming up likely the top spot is an uncontrolled increased in inflation.  We acknowledge that interest rates are likely to continue to move higher, that GDP growth and PMI readings will begin to sequentially show deceleration, and that inflation is indeed ticking up so all those issues should be monitored and that one or all may ultimately contribute to a significant broad-based correction in stock prices.   Importantly, however, my research remains steadfast that there is still upside potential for the overall equity market and that my ongoing recommended themes are still intact.  Consequently, I continue to view price moves that are contrary to my medium-term views as opportunities.  In times like these, when investors may be overly influenced by headline news or market volatility to make some emotional tactical investment decisions, I continue to remind subscribers that it is value added to have a disciplined objective process to help navigate the challenges.  At FSI, we use data driven approaches that 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 Despite being in the midst of the earnings reporting season, my calls continue to be dominated by macro discussions.  Growth decelerations remain the biggest point of worry and as I have been mentioning during April rising interest rates has not been mentioned.  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.  There has been little to zero proactive interest in Health Care, Staples, Utilities, and legacy Telecom.     SPECIFIC QUESTIONS Can you provide an update on your thoughts regarding a few non-equity asset classes — interest rates, the USD, and commodities? Any thoughts of the rotations and leadership during the later parts of April versus the first couple of weeks? When looking at the broad-based earnings revisions data are you seeing any signs of peak optimism yet? 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? What names from your single stock quantitative selection stood out if I was going to put new money to work right now? QUESTIONS AND MY ANSWERS Can you provide an update on your thoughts regarding a few non-equity asset classes — interest rates, the USD, and commodities? As frequent readers know by now, I do not usually make excessive comments regarding non-equity asset classes although I am always keeping an eye of them and how they might impact my equity market views and the earnings revisions backdrop as captured by my proprietary metric that I call Analyst Sentiment Measure (ASM), which still remains my most important indicator.  With that being said, I came into 2021 with a forecast for interest rates to move higher throughout the year, that the dollar would be weakish, and the non-precious metal commodity prices would move higher (2021 Outlook). The period from mid-March until mid-April has caused quite a bit of angst and potential among investors.  First, interest rates began to rise quite quickly during this window while the greenback started moving up, which caused some rotations to occur.  There were many forecasters suggesting economic growth and inflation were surging.  I commented in meetings and in previous Whispers that my work did not support those conclusions.  Then, the calendar flipped to April and there was a big reversal in rates, which was the first drop in yields since November and the biggest decline since last summer.  While this was occurring, the USD fell nearly 2%.  The combination of these shifts caused some more equity market rotations.  I find it interesting how perceptions around these asset classes and the views on economic growth have moved so much in both directions.  Based on my work, things are still basically on the same course that I laid out in January.  Thus, my research is still signaling that rates should move higher into year end, the dollar to be weakish, and non-precious metal commodities to be strong, which will likely have a relative benefit for the earnings revisions of Value/Cyclicals, Smid, Energy/Materials sectors, Financials, and historic weak dollar beneficiaries. Any thoughts of the rotations and leadership during the later parts of April versus the first couple of weeks? The leadership during the first half of April was dominated by areas that were NOT in my preferred sectors and themes as my recommended positioning lagged as I have been commenting and writing about for weeks.  Many forecasters called for an END of Value/Cyclicals/Recovery/Reflation and SMid trades.  Importantly, my earnings revisions-based work did not support that view and still does not.  The low in 10-yr yields was on 4/15 and the rotations back to towards my preferred areas resumed and continued into month end. Many have asked what changed to cause these dramatic tactical reversals.  From my view, there was little real change and the key drivers that I have been discussing are still in place — economic recovery beginning, corporate profit recovery story intact, earnings revisions are healthy and broad based, and policy on both the monetary and fiscal sides remain quite accommodative.  Thus, my work continues to stay the course and use tactical market action opportunistically to keep repositioning into my preferred areas and single stocks.  Based on a few of my more tactical tools, the rotational environment that has been present since mid-March had a lot to do with short-term overbought/oversold readings and the unwinding or crowded trades NOT the end of the major themes though.  I would remind investors that areas can get tactically overdone on either side and frequently lead to pauses or short-term countertrends moves, but importantly the earnings revisions trends have NOT changed, and my research still strongly suggests they are quite helpful in determining the medium-term trend.  When looking at the broad-based earnings revisions data are you seeing any signs of peak optimism yet? NO.  Not only is my analysis not showing any signs of extreme optimism, but it is actually still gaining strength, especially in Value/Cyclicals/Recovery/Reflation areas.  It has been my working hypothesis that my earnings revision work would continue to show strength until the domestic economy was open nationwide for at least 1-2 quarters before the potential for peak readings might show up.  At this point, I have no data that would suggest that I need to change this view.  Consequently, it would be quite challenging using my process tools and key indicators to have a bearish outlook at this time.  Yes, there is definitely no doubt in my mind that there will be time to shift portfolio positioning and lower risk exposure and that point is getting closer.  Yet, my research is not flashing those signals and until they do I continue to recommend keeping focused on being offensive in our preferred areas and single stocks.  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.  Apparently, this line of questioning shows up nearly every 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 NOT extreme as I have been stating.  I am on alert for the tactical warning sign, but it still has not appeared.  What names from your single stock quantitative selection stood out if I was going to put new money to work right now? I was pressed this past week by several accounts for a broad-based list of names that are favorable in my single stock ERM model and are actionable right now.  The names I am including are not the only ones that my work likes, but they definitely flagged as quite interesting and actionable. All the names are within the S&P 500, if you are a SMid cap investor or interested in non-US names, please reach out and I will provide those names to you.  These are in no particular order of preference. HES, DVN, FMC, ECL, PKG, HEI, OTIS, UPS, RHI, SKX, CHH, MAR, ROST, TJX, PNC, GS, AXP, COF, SYY, FIS, GPN, V. Bottom line:  My research strongly suggests that investors STAY THE COURSE despite the growing anxiety 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 are still what my research is signaling.  In addition, I continue restate there remains the possibility of bouts of volatility and headline risk over the next couple of weeks as the reporting for Corporate America’s 1Q21 earnings season heads towards its conclusion.  Hence, 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. Furthermore, my analysis continues to suggest that as we keep moving into the Spring/Summer and the increasing likelihood that the broad country-wide vaccination deployment reaches key thresholds that the odds of moving towards the national reopening of the U.S. economy rise each day.  It is my view that this definitive shift towards recovery will help strengthen supportive 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. _______________________ 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.  

Wall Street Whispers - What Our Clients Are Talking About Behind The Scenes

Wall Street Whispers - What Our Clients Are Talking About Behind The Scenes

Introduction to Wall Street WhispersEvery week I do over twenty idea conference calls with institutional clients from all over the world.  They range from tactical traders to strategic long only portfolio managers.  I literally speak and interact with the best and the brightest that the money management profession has to offer, and it is one of the aspects of my job that I love the most.  During these discussions, the clients are certainly interested in what my research is showing and what my views are on a host of different topics.  Importantly, however, I do not just present to my clients where they passively listen to my conclusions and best ideas.  The time spent is usually more of an active discussion and debate where investors are also sharing with me things they are thinking, worried about, what they own, and what they are thinking about buying and selling.  Sometimes clients agree with my views and at others there is significant pushback.  Because I have so much client engagement, the aggregation of the meetings can provide valuable information back to me about where the dominant thoughts and positioning of the institutional investing crowd are at that moment.  I remember back when I was in graduate school and just a regular retail investor.  I would wonder what it would be like to get a glimpse into what the “pros” were doing and thinking.  Well, going forward, I intend to share on Tuesdays what the professional investors that I speak with are thinking and doing with their portfolios to give our FSI subscribers a peak behind the so-called institutional curtain to help our retail clients.   I hope that you enjoy our new weekly note and would love to hear from you if you are finding it useful in your investment returns.  So, below is this week’s comment and within it you may see some terminology that might be unknown or confusing to you.  Over time, FSI will be creating a glossary of terms/vocabulary areas and some teaching sections, but for now they are still a work in progress.  Over the past week, the S&P 500 has ground up once again and has continued making new all-time highs even as the Wall Street forecasting crowd continues to shift towards worry.  Institutional investors have been negatively impacted by this growing anxiety and have either shifted away from Value/Cyclicals or have paused their rotations to reevaluate.  The main issue has shifted towards the expected deceleration in economic growth that is likely to occur in the coming quarters.  My work agrees that it is nearly assured that growth will decelerate as the recovery continues, but my work does NOT support the view that investors should be shifting away from my preferred positioning of Value/Cyclicals.  With that being said, there could be small selloffs along the way.  Importantly, however, my research remains resolute that there is still upside potential for the overall equity market and that my recommended themes are still intact.  Consequently, I continue to view price moves that are contrary to my medium-term views as opportunities.  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 that 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 As has been the case for several weeks, my calls continue to be dominated by macro discussions.  Clearly, rising interest rates is not currently at the top of investors worry list.  This has been replaced by the potential for peak rates of change in GDP and ISMs.  The week began like the last several with investors somewhat confused and seeking clarity and updates on my longstanding constructive views on the overall equity market and Value/Cyclicals/Recovery/Reflation.  The end of week shifted towards Biden administration tax proposals and several competitors turning towards neutral to outright bearish.  Through Thursday’s close, there were lots of questions about the weakness this past week in Financials, Technology, and Energy.  SPECIFIC QUESTIONS MY ANSWERS Several Wall Street firms have tempered their bullishness quite a bit as they are pointing towards the rate of change on growth peaking and that it will start decelerating.  What are your thoughts about rotating away from Value/Cyclicals/Reflation because of this? In my view, this is probably one of the most important points from this past week and will likely linger for a while.  Therefore, I think it needs some explaining.  YES, growth measured by either GDP or ISMs will likely hit their respective peak levels during 1H21.  Notably, however, we strongly DISAGREE that this expected roll over in these metrics should be used to rotate away from Value/Cyclicals/Reflation.  Yes, historically these types of decelerations have led to rotations away from Value/Cyclicals/Reflation.  So, why do I hold the view that investors should not only keep the same positioning, but should look to get even BIGGER?  I always remind investors that knowing the macro playbook is great, but I also warn to not just react to a line inflecting and start making definitive investment conclusions.  One has to fully understand WHY the relationships worked in the past.  In this case, I ask the following questions: What was happening in the past when GDP and ISMs were reaching peak levels and rolling over?  My research and historical work show that these metrics had been rising strongly and were getting late in their respective cycles, which had led to the Fed shifting to a tighter policy stance and interest rates were rising.  Thus, the rollover in the growth and activity metrics were showing the lagged impacts of the tightening that had occurred AND the continued tightening that was still going to come in the future.  So, the negative inflection was indeed signaling that the cycle was ending and that a rotation towards defensive growth and higher quality was warranted.  Is this in place now?  Is GDP growth and ISM peaking as a result of Fed policy and rising rates? In my view, definitely NO.  Hence, could the macro playbook be wrong this time?  My work suggests a high conviction YES.  The upcoming decelerations are merely the result of abnormally high levels of growth that will be reached as result of coming off low bases that will occur because of the forced economic lockdowns during 2020.  Based on my work, they are NOT signaling that the cycle is over and that we are heading on the path back to recession.  More likely, these metrics will normalize back to levels that were present pre-COVID.  Is there a difference in the earnings revisions behavior in these two scenarios? YES, big differences.  In the historically normal scenario, my earning revisions work begins flashing important warning signals for offense, cyclicality, and the leadership at that time.  What does this mean?  The Analyst Sentiment Measure indicators (ASMs) for a growing number of names begin to rollover from extreme positive readings, which I sometimes call falling from an upper right hand corner level.  This is what has normally caused me to start rotating away from these types of names, which was the case in February 2000 and December 2007/January 2008.  Now, in the scenario I am expecting for 2021, an unusual but not unprecedented situation should occur with the earnings revisions.  Despite the high likelihood that GDP and ISMs will rollover, the earnings revisions are likely to STRENGTHEN for Value/Cyclicals/Reflation.  Why would this happen?  It is my view that the analyst community has not broadly begun to raise their profit forecasts for the out quarters (3Q21 and 4Q21).  From my perspective, this is not fully understood by investors, and bearish forecasters are not considering this important fact.  If this plays out as my work strongly suggests it will, this is clearly NOT the time to rotate away from Value/Cyclicals/Reflation.  Based on my research, this is a critical point.  More on this in coming weeks. Stay the course and buy any recent relative weakness in Value/Cyclicals/Reflation.  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.  What stands out the most for the overall equity market from your earnings revisions based ERM model?  The continuation of broad-based strength in the U.S., especially within Value/Cyclicals/Reflation/Recovery and SMid.  Not surprisingly, the traditionally defensive areas of the market — HC, Staples, Utilities, Real Estate, and legacy Telecomm — are showing clear relative weakness, which continues to underpin our underweight recommendations.  There is close to zero evidence at this point based on my earnings work to abandon our longstanding key themes that we have been discussing.  More specifically, from a sector/sub-industry basis, are you seeing anything worrying in your earnings revisions work for SMid or the Recovery trade? First, the big take away is my work remains quite favorable; that is neither extreme nor showing signs of second derivative weakening.  Second, many of the same areas that I have been highlighting and recommending still look like there is more to come: Energy (Equip, E&P), Materials (Chemicals, Packaging, Industrials Metals, Construction Materials), Industrials (Building Products, Capital Goods/Machinery, Transports), CD (Auto & related, Vacation/Travel/Internet Booking, Retailers/Restaurants), Financials (Banks, Invest Banks/Brokers/Asset Managers), HC (Equipment/HMOs), Real Estate (Office/Retail/Hotel).  How does Tech look like both absolute and relative in your work? From both an absolute and relative basis, the overall sector still looks constructive.  Hence, I want to remind investors that despite my work favoring Value/Cyclicals/Reflation/Recovery and SMid that I have not and still am not recommending that they should abandon Growth/FAAMG.  I reiterate that my work suggests that investors just need to be mindful of their weightings and that the overall sector is likely to lag our preferred positioning of Value/Cyclicals/Reflation/Recovery and SMid, but should outperform the market, defense and cash.  Importantly, my earnings indicators still show that the ASMs for ALL the major Tech stocks still look favorable on an absolute basis.  Therefore, they are not shorts, nor should they be sold down to zero, but relatively they look less attractive.  On an intra-sector basis, the ERM continues to favor cyclical industries — Semi Equip, Semis, Data Processing (MA/V), Hardware (STX/WDC), and names related to the manufacturing chain (Electronic Instruments, EMS, Tech Distributors). 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.  As I have commented, my key aggressive tactical indicators — HALO, HALO-2, and V-squared (see explanations at the end of the note) — are still all favorable and NOT extreme.  With that being said, we continue to remain alert for a short-term be careful signal.  Bottom line:  As angst continues to growth within the Street, the U.S. equity market continues to climb the “Wall of Worry”, and my research strongly suggests that investors STAY THE COURSE.  As I have been discussing for many weeks, 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 remains the likelihood 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.  Notably, 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.  There is no change in view that as we keep moving into the Spring/Summer and the increasing likelihood that the broad country-wide vaccination deployment reaches key thresholds that the odds of moving towards the national reopening of the U.S. economy rise each day.  This will shift the recovery to another level that 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.  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.  

Wall Street Whispers - What Our Clients Are Talking About Behind The Scenes

Introduction to Wall Street WhispersEvery week I do over twenty idea conference calls with institutional clients from all over the world.  They range from tactical traders to strategic long only portfolio managers.  I literally speak and interact with the best and the brightest that the money management profession has to offer, and it is one of the aspects of my job that I love the most.  During these discussions, the clients are certainly interested in what my research is showing and what my views are on a host of different topics.  Importantly, however, I do not just present to my clients where they passively listen to my conclusions and best ideas.  The time spent is usually more of an active discussion and debate where investors are also sharing with me things they are thinking, worried about, what they own, and what they are thinking about buying and selling.  Sometimes clients agree with my views and at others there is significant pushback.  Because I have so much client engagement, the aggregation of the meetings can provide valuable information back to me about where the dominant thoughts and positioning of the institutional investing crowd are at that moment.  I remember back when I was in graduate school and just a regular retail investor.  I would wonder what it would be like to get a glimpse into what the “pros” were doing and thinking.  Well, going forward, I intend to share on Tuesdays what the professional investors that I speak with are thinking and doing with their portfolios to give our FSI subscribers a peak behind the so-called institutional curtain to help our retail clients.   I hope that you enjoy our new weekly note and would love to hear from you if you are finding it useful in your investment returns.  So, below is this week’s comment and within it you may see some terminology that might be unknown or confusing to you.  Over time, FSI will be creating a glossary of terms/vocabulary areas and some teaching sections, but for now they are still a work in progress.  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. _______________________ 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.  

Earnings Revision Work Says Buy The Dip on Cyclicals

The S&P 500 is at all-time highs above 4000 and has rallied nearly 90% off its low of 2191 reached on 3/23/20.  It has certainly been a year filled with lots of challenges for everyone, both personal and professional. As the market looks poised to continue higher as the U.S. economy is beginning to reopen and begin its recovery, I find it quite interesting that there is such a plethora of pessimism and concern from both our clients and from many forecasters.   During the entire rally, there have been many different bearish concerns that the pessimists have kept agitating about.  In my view, equities have been following the age-old Wall Street expression of “Climbing the Wall of Worry”.  Over the past couple of weeks, the latest worry that appears to have surfaced is that investors and forecasters are selling their Value/Cyclicals/Recovery/Reflation positioning and shifting towards quality defensive growth.  I have heard our clients express these concerns and the arguments from competitors to support this view, and I have a response to this suggested shift — with a high level of conviction that is based on my proprietary research process, my work does NOT support these conclusions AT ALL.  With that being said, my work strongly suggests that any recent relative bounces in quality/defensive/growth should be SOLD and dips in Value/Cyclicals/Recovery/Reflation should be BOUGHT.  My research continues to disagree with these negative outlooks and one major reason is that the earnings revisions backdrop for the S&P 1500 names remains quite robust and supportive of additional gains in the U.S. equity markets, which has been the case since the end of March 2020 when I first turned bullish post the COVID sell off.  It should be noted that not only are my proprietary earnings revisions metrics remaining healthy now, but I am expecting them to STRENGTHEN in the coming quarters.  Notably, this additional improvement continues to underpin my ongoing medium-term bullish view.  Despite the ongoing negative macro headlines that appear, as well as the other fears that recently surfaced, our view continues to be that one of the most important drivers for the continuation of the equity bull market is that a powerful corporate profit recovery is still in its infancy and because of the operating leverage improvements made by Corporate America during the past 12 months is being underappreciated.  Oh, and don’t forget the other “minor” contributor to our ongoing bullish view — the continuation of unprecedented monetary and fiscal stimulus. For many months, we have made the case that once the number of COVID cases shows a definitive improvement trend lower and investors begin to shift their focus to broad based re-openings of both the domestic and the global economies, the next important piece of supporting evidence in our proprietary earnings revisions work should be the reappearance of green bars, which will start showing that the magnitude of analyst estimate changes are beginning to shift absolute positive and accelerating.  Our research strongly suggests that this bullish occurrence is not an “if it will happen” but is a “when it will happen”, and that time is significantly drawing near.  Adding this key shift to a backdrop of broad based ASM strength and the continuation of the accommodative policy should further boost the bullish fuel that should keep powering the U.S. equity market to higher highs with Value/Cyclicals/Recovery/Reflation positioning leading the way.  Most preferred sectors: Financials, Industrials, and Materials with Consumer Discretionary, Information Technology and Energy better than neutral Neutral sectors: Communication Services Least preferred sectors: HC, Utilities, Consumer Staples and Real Estate

Wall Street Whispers - What Our Clients Are Talking About Behind The Scenes

Introduction to Wall Street WhispersEvery week I do over twenty idea conference calls with institutional clients from all over the world.  They range from tactical traders to strategic long only portfolio managers.  I literally speak and interact with the best and the brightest that the money management profession has to offer, and it is one of the aspects of my job that I love the most.  During these discussions, the clients are certainly interested in what my research is showing and what my views are on a host of different topics.  Importantly, however, I do not just present to my clients where they passively listen to my conclusions and best ideas.  The time spent is usually more of an active discussion and debate where investors are also sharing with me things they are thinking, worried about, what they own, and what they are thinking about buying and selling.  Sometimes clients agree with my views and at others there is significant pushback.  Because I have so much client engagement, the aggregation of the meetings can provide valuable information back to me about where the dominant thoughts and positioning of the institutional investing crowd are at that moment.  I remember back when I was in graduate school and just a regular retail investor.  I would wonder what it would be like to get a glimpse into what the “pros” were doing and thinking.  Well, going forward, I intend to share on Tuesdays what the professional investors that I speak with are thinking and doing with their portfolios to give our FSI subscribers a peak behind the so-called institutional curtain to help our retail clients.   I hope that you enjoy our new weekly note and would love to hear from you if you are finding it useful in your investment returns.  So, below is this week’s comment and within it you may see some terminology that might be unknown or confusing to you.  Over time, FSI will be creating a glossary of terms/vocabulary areas and some teaching sections, but for now they are still a work in progress.  As we enter into the 1Q21 earnings reporting season with the S&P 500 making new all-time highs above 4100, there are a lot of concerns that are on the minds of institutional investors. Based on our work, the anxiety is unwarranted, but we will always keep alert for something that may change the immediate to medium-term direction of the overall equity market and the positioning for investors. We continue to remind subscribers that 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 directional 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 The rise in interest rates has nearly disappeared from client discussions over the past.  It has been our observation over the last couple of months that there was NOT excessive optimism by investors, but there was a constructive tone about the forward outlook.  In my view, there has been a shift towards worry and less confidence in buying dips. The leadership in March and early-April has left investors to question their reopening and recovery positioning.  As the yield on the 10-yr treasury has pulled back, there was some anxiety by clients about a potential growth disappointment.  Similar to the last couple of weeks, I was pressed harder on my conviction level regarding my ongoing bullish views and my favorable outlooks for Value/Cyclicals over Secular Growth/FAANG, and SMid over Large had run their course and were over, which again seem to be coming from other forecasters and fears that others are fearful.  SPECIFIC QUESTIONS What are your thoughts on the upcoming 1Q21 Earnings season that will be beginning in earnest over the next couple of weeks? Interest rates have come down in early April as your forecasted.  Are you worried that there may an undershoot by the U.S. economy and a bigger growth scare? Are you still medium-term bullish? Has there been any changes in your key indicators to suggest your main themes are finished? Value/Cyclicals over Secular Growth/FAANGSMid over Large Based on your single stock earnings revision model what jumps out the most at the moment?  MY ANSWERS What are your thoughts on the upcoming 1Q21 Earnings season that will be beginning in earnest over the next couple of weeks? The current consensus expectation for 1Q21 S&P 500 yr/yr growth is nearly 22%, which is impacted by the low base from last year resulting from the early COVID lockdowns.  Not surprisingly, the best results are forecasted to come from more cyclicals sectors (CD, Financials, and Materials).  Our work suggests that the final results will be quite robust and could end up as high as 30%.  Forward guidance may not be fully optimistic, but we expect there will be a lot of commentary about less bad, clear signs of bottoming and early recovery, as well as the positive impacts of all the improved cost structures that will create significant operating leverage benefits for Corporate America.  Although, there may be a handful of high-profile misses or overly conservative guidance, our research is portending final results will be quite good and help provide fuel for equity markets to keep moving higher.  Interest rates have come down in early April as your forecasted.  Are you worried that there may an undershoot by the U.S. economy and a bigger growth scare? NO.  It has been our view that interest rates went up a bit too far too fast in March because of few specific macro reasons and that they would be flat to down during the early parts of April.  Just as we did not think the rise in March was the beginning of runaway upward move in interest rates based on surging inflation, our view that the drift down in rates is not reflecting an impending growth disappointment.  In my view, rates are heading higher from the abnormally low levels that accompanied the forced Pandemic economic lockdowns and will be normalizing during 2021, and possibly beyond.  This expected rise in interest rates will not likely be in straight line, but stair stepped higher as the economic and inflation ebb and flow for the remainder of the year.  Are you still medium-term bullish? YES, as I have been stating, my work remains quite constructive on the U.S. equity market and I have been viewing the challenging March price action opportunistically.  Not only has there is little to no evidence in all of my key indicators that a major market top is imminent, but my most important tools have been getting even more bullish — HALO, HALO-2, and V-squared (see explanations at the end of the note) are all flashing positive signals and are not extreme.   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.   Based on your single stock earnings revision model what jumps out the most at the moment?  Energy — there has been no deterioration of the favorable readings that we have been commenting on the past several months.  My work would suggest that the recent underperformance by Energy stocks has simply been a healthy pullback from tactically overbought conditions and not an END move, which is setting up as a buy the dip for the sector. Materials — similar to Energy, the sector continues to show strength and there are still a healthy number of interesting names in Chemicals, Industrial Metals (Copper/Steel/Aluminum), Fertilizers, and Packaging. Industrials — The number of higher quality Machinery and Capital Goods names remains quite broad based, as well as transportation related (Airlines, Air Freight, UBER/LYFT).  Building products is also an area of strength (ALLE, AOS, FBHS, JCI, MAS).  The work continues to like the three big “uglies” within the sector — BA, GE, and MMM.  NEW this month is that the Defense names are now looking better, and despite our preference to be more economically sensitive there is no denying that GD, LMT, and NOC are now favorable.  Consumer Discretionary — the work is still flagging compelling names in Auto/Related, the entire travel/vacation space (Cruise Lines/Casinos/Hotels/Travel companies), Restaurants, and many Retailers.  NEW this month is that the Automotive Retailers have improved (AAP, AZO, KMX, and ORLY). Technology — despite the recent price volatility, the sector still shows broad based strength that is dominated by more cyclical areas including the Semi-cap equip and Chips, as well as Hardware, Electronic Equip & Instruments, Electronic Components, Electronic Manufacturing Svcs, and Tech Distributors.  There were some new signs of warning that did show up in several names in Application Software for the first time that definitely caught our attention and will closely monitor.  Two names that our work is strongly suggesting will start to act better are MA and V.  For the LC Growth/FAANG investors, MSFT and AAPL within Tech still look quite favorable, as well as GOOGL and FB with Comm Services.  Financials — the sector’s favorable names are quite broad based including the Banks (both money center and regionals), Investment Banks/Brokers, Credit Cards (AXP, COF, DFS), and NEW this month is that there has been some improvement in the insurance sub-industries.  We have been commenting that it was our view that interest rates would be flat to down during April relative to the highs seen in March, and that this would likely lead to the sector underperforming.  Similar to my comments on Energy, I am viewing this weakness simply as a healthy pullback from tactically overbought conditions and not an END move, which is setting up a buy the dip for the sector. The areas that have the least number of favorable names remains Health Care, Staples, Utilities, legacy Telecom, and Real Estate as I have been highlighting since April 2020.  If one is looking for exposure within these sectors, there are some single stock ideas that do look like interesting opportunities, but it does take some digging. Bottom line: Stay the course. Our main themes of higher markets, Value/Cyclicals over Growth/FAANG, and SMid over large are still intact. There may be some volatility and headline risk over the next couple of weeks as Corporate America starts reporting their 1Q21 results. We will look to buy relative weakness in the sectors/stocks that my work continues to flag as favorable and avoid the areas that have unfavorable indicators. As we shift into Spring/Summer and the likelihood that the broad country-wide vaccination deployment accelerates, the odds of moving more towards recovery rise each day. Let’s be ready to seize the opportunity to achieve superior market beating returns.

Wall Street Whispers - What the professionals are talking about behind the scenes

Introduction to Wall Street WhispersEvery week I do over twenty idea conference calls with institutional clients from all over the world.  They range from tactical traders to strategic long only portfolio managers.  I literally speak and interact with the best and the brightest that the money management profession has to offer, and it is one of the aspects of my job that I love the most.  During these discussions, the clients are certainly interested in what my research is showing and what my views are on a host of different topics.  Importantly, however, I do not just present to my clients where they passively listen to my conclusions and best ideas.  The time spent is usually more of an active discussion and debate where investors are also sharing with me things they are thinking, worried about, what they own, and what they are thinking about buying and selling.  Sometimes clients agree with my views and at others there is significant pushback.  Because I have so much client engagement, the aggregation of the meetings can provide valuable information back to me about where the dominant thoughts and positioning of the institutional investing crowd are at that moment.  I remember back when I was in graduate school and just a regular retail investor.  I would wonder what it would be like to get a glimpse into what the “pros” were doing and thinking.  Well, going forward, I intend to share on Tuesdays what the professional investors that I speak with are thinking and doing with their portfolios to give our FSI subscribers a peak behind the so-called institutional curtain to help our retail clients.   I hope that you enjoy our new weekly note and would love to hear from you if you are finding it useful in your investment returns.  So, below is this week’s comment and within it you may see some terminology that might be unknown or confusing to you.  Over time, FSI will be creating a glossary of terms/vocabulary areas and some teaching sections, but for now they are still a work in progress.  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. 

Wall Street Whispers - What the professionals are talking about behinds the scenes

Introduction to Wall Street WhispersEvery week I do over twenty idea conference calls with institutional clients from all over the world.  They range from tactical traders to strategic long only portfolio managers.  I literally speak and interact with the best and the brightest that the money management profession has to offer, and it is one of the aspects of my job that I love the most.  During these discussions, the clients are certainly interested in what my research is showing and what my views are on a host of different topics.  Importantly, however, I do not just present to my clients where they passively listen to my conclusions and best ideas.  The time spent is usually more of an active discussion and debate where investors are also sharing with me things they are thinking, worried about, what they own, and what they are thinking about buying and selling.  Sometimes clients agree with my views and at others there is significant pushback.  Because I have so much client engagement, the aggregation of the meetings can provide valuable information back to me about where the dominant thoughts and positioning of the institutional investing crowd are at that moment.  I remember back when I was in graduate school and just a regular retail investor.  I would wonder what it would be like to get a glimpse into what the “pros” were doing and thinking.  Well, going forward, I intend to share on Tuesdays what the professional investors that I speak with are thinking and doing with their portfolios to give our FSI subscribers a peak behind the so-called institutional curtain to help our retail clients.   I hope that you enjoy our new weekly note and would love to hear from you if you are finding it useful in your investment returns.  So, below is this week’s comment and within it you may see some terminology that might be unknown or confusing to you.  Over time, FSI will be creating a glossary of terms/vocabulary areas and some teaching sections, but for now they are still a work in progress.  There has been considerable headline news and market/sector volatility over the past week, which can make the investing backdrop challenging to even 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 directional 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 I will reiterate my comment from last week because it is quite apparent — every client has concerns about something, and this has been the case all year.  Thus, it is my view that there is not rampant bullishness.   Most calls had more macro discussions than usual. There were a lot of questions regarding sharp price drawdowns for a few sectors and whether their revisions confirmed the weakness or not.    Concerns and questions about the rise in interest rates continue to dominate.  A few clients asked about a potential change in tax policy, which was new this week. SPECIFIC QUESTIONS Performance this week saw Large caps lead and SMid lagged? Is this the end of the move for SMid? Energy has been by far the worst sector this week through Thursday’s close as every name has posted negative returns through Thursday's close. Does this concern you? Is this sector's impressive outperformance run over? Financials, especially Banks, continue to act well. What is your earnings revisions work saying? On an intra-sector basis, Application Software and Semi-related sub-industries have seen poor price performance. Does your research view them the same or are there differences?  MY ANSWERS SMid (Russell 2000) has significantly outperformed Large Cap (S&P 500) by a sizeable margin since the end of September 2020.  Importantly, our broad-based earnings revisions work started seeing shifts in the relative attractiveness down the cap scale during mid-October and that trend remains in place, which has supported SMid relative performance and caused me to make a major shift away from Large Caps for the first time in over five years. During this week through Thursday’s close, performance has been weaker on each step down in cap size (Large Cap (best), Mid cap, and then Small (worst)).  I have made four key points in client meetings:1. The amount of outperformance was extreme and anytime this happens price pauses/consolidations/pullbacks can occur.2. The earnings revisions relative favorability still favors SMid and I expect this to continue as the U.S. begins to reopen3. Because of the earnings revisions support, my research suggests that the relative weakness in SMid is a pause and not an end.4.  Thus, based on my work, I advise buying the dip in SMid as there is likely more to come. The S&P 500 Energy sector (GICS L-1) made its relative low in early November 2020 and has beat the benchmark index by a whopping 54% points since then, which rivals it’s best outperformance during that period of time since at least 1990.  So, it is not a stretch to say the sector is extended and overbought, and I have several indicators that clearly support that conclusion.  Hence, a pause/pullback is not that surprising.  This week Energy has been by far the worst sector by over 6% points. My works suggests that the pullback is healthy, counter trend, and the proprietary earnings revisions indicators for the sector at aggregate level and at the level of the individual stocks strongly portends that this underperformance period will likely be a great opportunity for investors to buy the dip and raise their exposure.  Indeed, Energy has seen its key earnings metric bottom in mid-October/mid-November and has shown incremental improvement in every monthly review since that time, which has been a major factor in my three sector upgrades since November. Our single stock work has been highlighting HAL, SLB, OXY, DVN, EOG, FANG, MRO, PXD, PSX, and OKE in the S&P 500, and RIG, CHX, CNX, MUR, XEC in the S&P 400 Midcap Index.  The proprietary Analyst Sentiment Indicator (ASM) for the Financials sector (GICS L-1) continues to be quite robust after bottoming in late-October/mid-November, which has been the main driver behind my upgrading the sector three times in the last five months.  The sub-industries that continue to stand out on an intra-sector basis are the Banks, both Diversified and Regionals, as well as the Investment Banks/Brokers, and the Exchanges.  At some point, the sector will need a price pause/consolidation, but I will view that as an opportunity to buy the relative dip. 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. There are too many SMid names to list here, but if interested please reach out and I will make them available.  Yes, both the Application Software and Semi-related sub-industries relative performance has been hit during late-February till now.  My tactical work strongly suggests that price bounces are quite close to occurring. On this basis alone, my indicators look very similar for both areas. However, the earnings revisions look quite different at this time. My work shows some clearly less good and some absolute deterioration in the Application software names while the Semi areas still look quite healthy. With that being said, my tactical work points to both areas being poised to bottom over the next week or two; however, based on the more strategic earnings revision indicators the case for making new relative highs is much more likely for the Semi-related areas.  This is consistent with the entirety of our key factors that continues to flag cyclical Tech sub-industries as more favorable than secular growth areas.

Wall Street Whispers - What the professionals are talking about behind the scenes

What is Wall Street Whispers? Every week I do over twenty idea conference calls with institutional clients from all over the world.  They range from tactical traders to strategic long only portfolio managers.  I literally speak and interact with the best and the brightest that the money management profession has to offer, and it is one of the aspects of my job that I love the most. During these discussions, the clients are certainly interested in what my research is showing and what my views are on a host of different topics.  Importantly, however, I do not just present to my clients where they passively listen to my conclusions and best ideas.  The time spent is usually more of an active discussion and debate where investors are also sharing with me things they are thinking, worried about, what they own, and what they are thinking about buying and selling.  Sometimes clients agree with my views and at others there is significant pushback.  Because I have so much client engagement, the aggregation of the meetings can provide valuable information back to me about where the dominant thoughts and positioning of the institutional investing crowd are at that moment.I remember back when I was in graduate school and just a regular retail investor.  I would wonder what it would be like to get a glimpse into what the “pros” were doing and thinking.  Well, going forward, I intend to share on Tuesdays what the professional investors that I speak with are thinking and doing with their portfolios to give our FSI subscribers a peak behind the so-called institutional curtain to help our retail clients.  I hope that you enjoy our new weekly note and would love to hear from you if you are finding it useful in your investment returns.  So, below is this week’s comment and within it you may see some terminology that might be unknown or confusing to you.  Over time, FSI will be creating a glossary of terms/vocabulary areas and some teach in sections, but for now they are still a work in progress.  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 General issues/observations Everyone is worried about something.  I do not get a sense of excessive bullishness or complacency at all, which runs counter to what I see in the news headlines and/or from other forecasters.   There continues to be a lot of questions and concerns about rising inflation and the increase in interest rates.  Valuation is also a popular topic as well.  There is a desire to know if portfolios have fully rotated towards the Value/Cyclical trade and I get the sense that more rotating needs to occur.  Clients have been more accepting of my favorable Energy views than they were 2-3 months ago, but except for a handful of deep value managers, their exposure has gone from close to zero to 2-3% near benchmark.  Very few have communicated that they have made large overweight bets.  I still get a fair amount of pushback on my bullish overall equity market forecast and I get asked a lot about the level of conviction that I have in my views..  Being a contrarian at heart, I find this quite a positive development.  Specific questions Growth managers are a bit shaken and confidence is lower than normal as a result of the recent carnage of the highfliers.  How to play these types of names now? After being beaten up for some time and now experiencing some significant performance gains, Value managers are struggling with valuation levels for some of the Cyclicals and asking how much longer can value keep outperforming?  This was a common theme last week as well.  What do I do with a stock that is trading above its pre-COVID high and its respective level of earnings is still well below?  Can it still go higher? Is the recent uptick in interest rates “the event” you have been looking for and discussed in your outlook publication?  Is there a level of interest rates you are focused on?  What are your sector weightings? What single stock names stand out right now as actionable and can/should be bought right now? My Answers First, I have been banging the drum about shifting away from secular growth and moving towards Value/Cyclicals/Fins/Energy/Down the cap scale since September/October.  Importantly, my research still strongly suggests that investors should not completely abandon Growth because their earnings revisions are still solid.  Thus, it is not that my work dislikes Growth but more that it relatively is more favorable towards Value. Second, there are tactical trading opportunities in the names and areas that have been hardest hit.  My more aggressive, shorter-term indicators that weigh price action and other factors more than my usually important earnings revisions flashed extreme negative readings early this last week and are now clearly showing favorable signs.  My work would suggest that any name that was surging to all-time-highs and had a sharp price sell-off that took the stock down to an obvious technical support level (chart support, moving average, Fibonacci retracement level, etc) could be considered for purchase and a recovery bounce, especially if their respective ASM indicators are still favorable. In my opinion, what is important for the medium-term health of these types of names will be what happens after the oversold tactical bounces occur.  The bull case for a name – the stock bounces and is able to make a NEW high and its ASM indicator is still favorable.  My work would suggest in this case that the name is still good and has more upside to come.  The bearish case for a name – the stock bounces but FAILS at, or below, its respective recent high AND its ASM shows signs of rolling over and weakening.  In this scenario, the name is likely to struggle going forward. So, if you are going to try and tactically trade some beaten up high fliers, you will likely need to be nimble and be on the alert about how the bounce unfolds as it will likely be quite important for its ongoing sustainable health. From a medium-term perspective, I continue to favor cyclical growth areas instead of secular – HC Equipment, Semi Equip, Semi Chips, Data Processing (MA, VA) Tech Hardware (STX, WDC), Electronic Equip & Instruments, Electronic Components, Electronic Manufacturing, Tech Distributors, Internet Travel/Entertainment (BKNG, EXPE, LYV), and Hotels to name some of the areas I keep mentioning the most often.  I still continue to highlight DIS as a name that should be a core holding based on my work. The discussions with Value managers continue to have different concerns as most have been performing well and still holding up during the selloff, and this has a lot of them worried. Furthermore, they are anxious about valuation levels and how much longer can the style keep working.I keep reiterating that my work is still signaling additional runway and enough magnitude of performance for investors to still play my favorite Cyclical/Value areas.  My work still points to the conclusion that we are still in only the first third of the outperformance for Cyclicals/Value. Additionally, I firmly believe that one of the biggest challenges for Value managers is that traditional Cyclical/Value areas might not look as attractive on a valuation basis compared with what investors would ideally like to see.  Critically, I keep stating and warning that it is NOT the time to begin looking in laggard defensive areas that look cheap, like Pharma.  It will come, but you have time. I am getting the question about names that are now higher than their pre-COVID price levels despite their earnings being nowhere near recovery let alone also at new high more and more this week.  First, I empathize with investors that have a disciplined approach, and these occurrences can seem irrational, unsettling, or maybe even just dumb.  Second, I am a strategist that does not have the same limitations and the fact is that because I use different, time-tested tools I can make sense out of certain conditions like these more easily.  Importantly, my work suggests that where we are in the cycle, where policy is, and since my earnings revision work is strong and expected to continue that these types of names will likely keep working and move even higher.  To put it simply, while the earnings revisions momentum continues and policy remains accommodative, tactical pullbacks tend to be opportunities to buy the dips and the duration that this can stay in place is longer than what rigorous logic may suggest.  The recent bout of rising rates and inflation anxiety is NOT the event I was looking for to likely lead to a major market top (both long time duration and big price decline).  However, it is a valuable test run and something investors will have to deal with again and again this year until we finally get to the big event that I am trying to identify.  I am more in the camp that the current rise in rates will moderate and possibly see the 10yr yield return below 1.5% in the short term while still expecting the 10yr interest to rise to 1.75-2% by year end.   Full above benchmark in Financials (recently upgraded for the 3x), Industrials, Materials with Energy (recently upgraded for the 3x), CD, and Tech at tilt above. My below benchmark sectors are Health Care, Staples, Utes, and Real Estate. Specific names I mentioned the most over the past week that my work suggests can be bought right now:  BA, airlines (UAL, AAL, LUV), cruise lines (CCL, RCL), OXY, GE, VMC, hotels (HLT, MAR), internet travel/tickets (BKNG, EXPE, LYV), banks (WFC, BAC, JPM), IPG, MA, V.  Now, as we remind in every note, everything mentioned above may not be appropriate for all readers to implement, so please think about your goals, objectives, and risk reward parameters before jumping into action.  With that being said, my goal is to help provide additional thoughts about the equity markets and to further help you navigate the investing waters to maximize your portfolio returns. 

Wall Street Whispers – What the professionals are talking about behind the scenes

Every week I do over twenty idea conference calls with institutional clients from all over the world.  They range from tactical traders to strategic long only portfolio managers.  I literally speak and interact with the best and the brightest that the money management profession has to offer, and it is one of the aspects of my job that I love the most.  During these discussions, the clients are always interested in what my research is showing and what my views are on a host of different topics.  Importantly, however, I do not just present to my clients where they passively listen to my conclusions and best ideas.  The time spent is usually more of an active discussion and debate where investors are also sharing with me things they are thinking, worried about, what they own, and what they are thinking about buying and selling.  Sometimes clients agree with my views and at others there is significant pushback.  Because I have so much client engagement, the aggregation of the meetings can provide valuable information back to me about where the dominant thoughts and positioning of the institutional investing crowd are at that moment.  I remember back when I was in graduate school and just a regular retail investor.  I would wonder what it would be like to get a glimpse into what that “pros” were doing and thinking.  Well, going forward, I intend to share on Tuesdays what the professional investors that I speak with are thinking and doing with their portfolios to give our FSI subscribers a peak behind the so-called institutional curtain to help our retail clients.   I hope that you enjoy our new weekly note and would love to hear from you if you are finding it useful in your investment returns.  So, below is my first comment and within it you may see some terminology that might be unknow or confusing to you.  Over time, FSI will be creating a glossary of terms/vocabulary areas and some teach in sections, but for now they are still a work in progress.  Stock market display screen in city Over the past week, the bullet points below are the questions and issues that were brought up the most and I will then follow with my responses. Growth managers are concerned, confused, and wondering if Growth is done or should they be buying this dip? Conversely, Value managers are struggling somewhat with the valuation levels for some of the Cyclicals and asking how much longer can value keep outperforming? Everyone asking about our take on the recent volatility in both the equity market and the rising in interest rates. What are your sector weightings? Single stock contrarian names that were mentioned a lot. My answers I have been warning and discussing moving away from away from Growth and more towards Value since September/October.  With that being said, I continue to state “I am NOT completely abandoning Growth” because their earnings revisions are still solid.  Thus, it is not that my work dislikes Growth but more that it relatively is more favorable about Value. I continue to suggest that Growth managers look into more cyclical growth areas – HC Equipment, Semi Equip, Semi Chips, Data Processing (MA, VA) Tech Hardware (STX, WDC), Electronic Equip & Instruments, Electronic Components, Electronic Manufacturing, Tech Distributors, Internet Travel/Entertainment (BKNG, EXPE, LYV), and Hotels to name some of the areas he mentioned the most often.  I continue to highlight DIS as a name that should be a core holding based on my work. As the week progressed and the market sell off continued, the discussions shifted somewhat.  I commented that the size of sell offs in some of the highfliers that my earnings work still likes have been so large that I would consider buying the dips in some of them if the price damage was extreme. The discussions with Value manager had a much different tone as most have been performing well and still holding up during the selloff.  Despite this, they are worried about valuation levels as well as how much longer can the style keep working. I have commented that my work is still signaling additional runway and enough magnitude of performance for investors to still play my favorite Cyclical/Value areas.  On Friday, I was asked in what inning I thought the outperformance of Cyclicals/Value was in and to my client’s surprise I said “bottom of the 2nd” (i.e. still quite early). I continue to state the one of the biggest challenges for Value managers is that traditional Cyclical/Value areas might not look as attractive on a valuation basis.  Importantly, I have been warning NOT to begin looking in laggard defensive areas that look cheap, like Pharma, and that the time will come for this types of stocks but not now. I have been stating that the move up in bond yields and the shift of investors concerns towards rising inflation, commodity super cycles, and stagflation are quite over done at this point in time.  I have made some macro comments about the bond market acting more mechanically and artificially, and that we are likely within 1-5 days for things settling down, which should also help the equity markets, which would likely be bullish for equities and a move back to the old highs and beyond.  Full above benchmark in Financials (recently upgraded for the 3x), Industrials, Materials with Energy (recently upgraded for the 3x), CD, and Tech at tilt above. My below benchmark sectors are Health Care, Staples, Utes, and Real Estate. Contrarian:  HAL, SLB, OXY, DVN, EOG, FANG, HFC, CF, WRK, BA, GE, MMM, all airlines, casinos, cruise lines, hotels, travel related internet, banks, BAX, BDX, BSX Now everything mentioned may not appropriate for every reader to implement, so please think about your goals, objectives, and risk reward parameters before jumping into action.  With that being said, my goal is to help provide additional thoughts about the equity markets and to further help you navigate the investing waters to maximize your portfolio returns. 

Maintaining Bullish View; Financials and Energy Upgraded

Is anyone else tired like me after this week’s trading action in the S&P 500?  The market started the week quite strong and rallied up about 2.7% to nicely reverse last’s week down performance.  However, during the middle of the week, fears of rising interest rates began to spill over into equities and caused some down action that pulled the index down nearly 5%, which was disproportionately impacted by even larger declines by in many growthier names within Consumer Discretionary and Tech.  Investors then turned their attention Fed Chairman Powell on Wednesday and his words during an online event did not calm the bond market and further pressured stocks.  After flirting with a bigger selloff, the S&P 500 found energy on Friday from both the positive release of the monthly employment data release and some dovish Fed comments to end the week up for day and slight gain for the week.  Lots of running to make so little progress.  At the beginning of the week, we released the results of our monthly deep dive into our sector (GICS-L-1) work and have updated our FSI Sector Allocation recommendations (please see the sector section of our website).  We wanted to end the week by reiterating the main conclusions that our allocation methodology has been suggesting: 1.      Traditional defensive area (HC, Staples, Utes and RE) will likely continue their underperformance of the S&P 500 and are thus Below Benchmark sectors. 2.      Continue shifting toward Epicenter/Value/Cyclicals/Financials and away from Growth/FAANG 3.      Do not completely abandon Growth/FAANG names, and this week’s severe price corrections with CD/Tech may be creating an opportunity to selectively add some exposure.  Getting more granular, our analysis has resulted in us upgrading the Financials and Energy sectors, which were the third upgrades for both sectors over the past five months. Despite the recent market volatility our tactical indicators are favorable, which has us aligned with our ongoing medium-term bullish stance. Also, we have lowered Consumer Discretionary from Above Benchmark to Tilt Above, however, our work still shows that there are still many favorable individual stocks within the sector.  It should be noted that the sector is being overly impacted by nearly 50% weighing of AMZN, TSLA, and HD. Based on our indicators and read on the macro environment the most important underpinnings for the overall equity market and our continued expectations for even higher highs are still in place. Although there has been some anxiety coming from the bond market, it is our view that the Fed is still likely to hold on for an extended period and the recent upward move in rates was overdone. It is our expectation that a favorable liquidity environment will endure for the foreseeable future. Notwithstanding rumblings from the ‘Bond Vigilantes’, the rate backdrop remains near record lows and supportive of further equity gains. The real rate on the 10-yr when accounting for inflation is near-zero. We continue to reiterate that the earnings revision data for the broad equity market, which is a major part of our investment process (and has proved its worth in adding value over 20 years), is still quite healthy. Our expectations are that this remains the case as analysts and investors start shifting their focus to economic recovery and a powerful corporate profit cycle. Thus, we encourage investors to remain focused on the long-term the; 6 month, 12 month and 18 month time horizon for which readings are still overwhelmingly positive. When looking for risks that are out there and what we watch closely, the first and main potential concern is sudden and sharp increases in interest rates and inflation expectations may remain problematic for the short-term and may return from time to time throughout the year. There are other issues that could obviously cause increased volatility like a fourth wave of COVID-19 or increasing ubiquity of the new viral strains. The bottom line this week is that the current bout of volatility is likely creating an opportunity for investors to raise exposure in areas and specific stocks that may have begun to run away from us and to move further into the most favorable ideas that our research is flagging.  Most preferred sectors: Financials, Industrials, and Materials with Information Technology, Energy and Consumer Discretionary better than neutral Neutral sectors: Communication Services Least preferred sectors: HC, Utilities, Consumer Staples and Real Estate

Despite Increased Volatility, Key Model Says Stay Bullish

One of my most important analytical tools is my quantitative stock selection model, which I call ERM and will be the basis for the upcoming release of FSI’s new single stock Dunks product. My team and I update my model every week and are always looking for new opportunities for clients. Importantly, we do a deep dive into the names in the S&P 1500 Super Composite and I wanted to share my main conclusions in this week’s comment. Broad Summary Comments: The first key takeaway is the same one that we have been discussing for the last 6-9+ months — the earnings revisions backdrop for the S&P 1500 names remains robust and supportive of additional gains in the U.S. equity markets, which has been in place since the end of March 2020. Hence, I am retaining my longstanding constructive medium-term view for equities, which was first communicated on 3/20/20. There remains a plethora of bears that that are still focused on overvaluation, the size of the move off the March low, the ongoing COVID cases, and now fears of rising inflation and interest rates. These are all fair points to consider. Yet, my focus continues to be on the powerful bullish combination of broad-based positive earnings revisions as measured by my proprietary ASM indicator, still historically low interest rates, record monetary and fiscal stimulus that should continue to overpower the negative headwinds. New Observations from the broad-based S&P 1500 ERM review When looking at the overall Index on cap size basis, the slow shift of favorable revisions down the cap scale that we first saw in our work back in 3Q20 is still occurring. Thus, we have been more favorable on SMid cap names relative to Large Caps for the first time in many years. There are three main areas of favorable earnings revision readings — 1) Secular Growth/FAANG; 2) Value/Cyclicals that are higher quality and generally more growthy (e.g., Capital Goods, Machinery, Semi related); and 3) Value/Cyclicals/Financials that includes the front line recovery/Epicenter universe and deep commodity/industrial/consumer/interest rate cyclicals. Sector level observations that I found interesting: Energy — even though my work is still not broadly favorable, there continues to be slow marginal improvement, which we first highlighted back in November. Please note that we have upgraded the sector twice over the last four months. Materials — there are still a healthy number of interesting names in Chemicals, Industrial Metals (Copper/Steel/Aluminum), and Packaging. Industrials — Defense-related names continue to look weak and the more interesting areas are in Machinery, Cap Goods, Rails, and Airlines, which has been the case for several months. Consumer Discretionary — the work continues to flag compelling names in Auto/Related, the entire travel/vacation space (Casinos/Hotels/Travel companies), Restaurants, and many Retailers. Technology — my indicators are still highlighting the Semi-cap equip and Chips names despite their explosive price moves my work portends that this profit cycle is still in the early innings, which would strongly imply additional stock price outperformance. Furthermore, most cyclical names within the sector look quite interesting with Hardware, Electronic Equip & Instruments, Electronic Components, Electronic Manufacturing Svcs, and Tech Distributors. Financials —the SMID regional banks started looking better back in late October/early November and this trend has broadened up the cap scale as time has passed, which has led us to upgrade the sector twice in the last four months. Defensive areas — my work has been flagging since April 2020 that the least number of favorable names in Staples, Utilities, legacy Telecom, and Real Estate. If one is looking for exposure within these sectors, there are some single stock ideas that do look like interesting opportunities, but it does take some digging. Most preferred sectors: Consumer Discretionary, Industrials, and Materials with Information Technology and Financials better than neutral Neutral sectors: Energy, Communication Services Least preferred sectors: HC, Utilities, Consumer Staples and Real Estate Bottom Line: Despite the recent volatility as a result of weakness in the fixed income markets, our key indicators remain supportive of additional gains in the U.S. equity market. Despite the possibility of pullbacks, our research strongly suggests that investors view them opportunistically and raise exposures in our preferred sectors and stocks if they occur.

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