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REMINDER: Live Webinar and Q&A

Markets According to Brian: 2H 2021 — Navigating a Challenging Backdrop

Details and Specifics

Date: Wednesday May 26, 2021

Time: 3:00 PM ET

Duration: 45-60 minutes (including live Q&A)

Click HERE to register

The S&P continues to hold up well despite the ongoing concerns of the bears and the multitude of economic and macro worries that they keep pointing to as support for their less than favorable forecasts for the U.S equity market.  Although the topic of surging inflation has been in the headlines quite a bit, the yield on the 10-yr U.S. Treasury bond has fallen from an intra-month high of 1.70% to 1.56%.  Not what one would expect if a sustained bout of inflation was taking hold of the domestic economy.  The extreme focus on the bigger picture macro backdrop has led traders to react to nearly every news story that hits the tape, and the result has been quite a bit of intra-market churn for positioning.  One day Growth/Technology gets hit hard and a few days later they are rallying hard again and there have also been a similar back and forth with the Cyclicals/Value/Recovery areas as well.  This type of a trading environment can be quite challenging for any investor regardless of experience level, especially if one is only reacting to the day’s hot topic. 

The recent market action comes as no surprise to me as I have been discussing for nearly two months that U.S. equity markets would likely be subjected to tactical spells of selling pressure and intra-market rotations as a result of macro-related news.  With this being said, I have repeatedly stated that investors should embrace the choppy market action and view the volatility opportunistically because my proprietary investment process continues to indicate that the environment for equities is still quite constructive.  My key indicators are sending clearly constructive signals and I am thus reiterating both my overall bullish market thesis and that the S&P 500 rally still has legs.

During challenging trading environments that are accompanied by a lot of headline news stories, there is a tendency for investors to be caught up on everything that is going on around them, which can lead to less than stellar investment decisions.  However, it can be invaluable to have a process and a rigorous discipline to help keep one focused to avoid becoming emotional.  Here at FSInight.com, my colleagues and I have spent over two decades developing objective tools to help investors identify rewarding investment opportunities, particularly when the equity environment becomes challenging.  We use objective, data driven and systematic techniques that are based upon rigorous analysis. This is the foundation for our research and idea generation to help our subscribers stay grounded and properly positioned to take advantage of the dominant trend.

ISSUES

• Yet again, macro is the most popular topic. The types of questions were more general and less focused on one particular topic, which had been the case since mid-March, which had been clearly centered on rising rates, falling rates, slowing growth, inflation, and stagflation. 

• I would categorize investors as anxious, somewhat perplexed, and searching for the next big catalyst for equities.  The minority are outright bullish and there are only a handful who are as constructive as my research has been suggesting. 

• A lot of time was spent again discussing recent earnings reports and the subsequent performance of companies.  Many are trying to get a handle on if good results that were followed by weakish price reactions are signaling anything significant.

• A few new topics came up this week — Rebalancing of ESG universes that is supposed to occur during 4Q21, the USD, how sustainable is the current commodity strength as copper and others had some price pullbacks, disruptions and impacts of global supply lines not running as smoothly as pre-COVID and the potential to be problematic for longer.

• Sectors where there was the most interest this past week were Technology, Industrials, Materials, and Energy.  There remains tepid interest in Utilities, Real Estate, and legacy Telecom. 

SPECIFIC QUESTIONS

• Any thoughts on the intra-market sector rotations?  Defensive areas acted better while cyclicality lagged.  Are the price moves and leadership supported by your proprietary 8-panel analysis and earnings revisions metrics?

• As the earnings season winds down and more consumer and retail related names have been reporting, what does the earnings revision data show for these areas, which have seen generally weakish stock price performance?

• With the down/up nature of this week’s equity market performance and it nearly ending unchanged, what are your aggressive tactical indicators signaling now?

• Any stocks jump out at you based on your single stock quantitative selection model?

MY ANSWERS

Any thoughts on the intra-market sector rotations?  Defensive areas acted better while cyclicality lagged.  Are the price moves and leadership supported by your proprietary 8-panel analysis and earnings revisions metrics?

NO.  The outperformance of Real Estate, Health Care, and Utilities and the underperformance of Energy, Industrials, and Materials are all NOT supported by my main sector tool, 8-panel analysis, which normally has a strategic focus looking out 9-18 months.  If you’re unfamiliar with my unique data driven research process, I am including my Intro to Methodology link below.  

FSInsight 2021 Outlook

With that being said, from a tactical perspective, my HALO indicator for each of the sectors mentioned above did provide some aggressive trading signals that showed there was a strong probability of defensive areas getting a bit of a relative short-term bump.  Generally, I will not make aggressive tactical calls if they go against the earnings revisions signal for an area, which was the case here, unless an account specifically requests trading calls. 

As we end the week, the HALOs for the Real Estate, Health Care, and Utilities still appear to have a bit further to run before their tactical signals flip back to unfavorable.  Not surprising and consistent with those sectors, Energy, Industrials, and Materials have not yet reversed back to positive signals.  So, we will be on the lookout next week for new tactical readings to bring our medium term and short-term views back into alignment. 

Bottom line:  My work strongly suggests that investors use any continuation of this week’s defensive leadership as an opportunity to trim/sell RE/HC/Utes and raise/buy Energy, Industrial, and Materials names that are favorable in my single stock quantitative selection model, which I call ERM (see methodology link above for brief description). 

As the earnings season winds down and more consumer and retail related names have been reporting, what does the earnings revision data show for these areas, which have seen generally weak stock price performance?

From my key earnings revisions metrics, the consumer related actual results and forward expectations continue to get “less bad” to partially good.  Hence, from a slope and a rate of change perspective, my work continues to see continued healing that should begin to strengthen further to absolutely positive, which should keep providing powerful tailwinds for more outperformance during 2H21.  

Despite what my research and key indicators are showing, many to most of the Consumer Discretionary names had less than impressive to poor stock reactions subsequent to their respective operating result announcements.  How do I reconcile my work being favorable but the stocks acting quite differently?

From my perspective, 1) the profits results were predominately beats, but nearly all the names missed on revenues and/or gave conservative forward guidance that did not impress tactical traders; and 2) most names in these areas came into the reporting season extended from a tactical price performance basis.  The result was tactical profit taking, but no change in the medium-term bullish outlooks.   

Bottom line:  Importantly, the Consumer Discretionary names continue to look quite favorable and my ERM model suggests that investors should be looking to buy the recent dips in recovery/epicenter areas — travel, vacation, hotels/casinos, internet travel booking and related, restaurants, and retailers. 

With the down/up nature of this week’s equity market performance and it ending nearly unchanged, what are your aggressive tactical indicators signaling now?

Still in the favorable mode that was present at the beginning of the week.  My key aggressive tactical indicators — HALO-2, and V-squared (see explanations at the end of the note) — moved higher by week’s end, but it was clearly a struggle.  Thus, they are still favorable and not extreme, which points to flat-to-up equity markets. 

Bottom line:  My aggressive tactical indicators suggest that investors should still be looking for further equity gains.

Any stocks jump out at you based on your single stock quantitative selection model?

Although my work has lots of names that are favorable, I was asked this week more than usual for just a smaller handful of ideas that have a positive earnings revisions setup and have been acting reasonably well based on my preferred metrics.   

The names I mentioned the most were:  BKNG, CME, FDX, ASML, EW, AXP

Bottom line:  My key indicators are still portending additional upside for the overall U.S. equity market.  Importantly, my ongoing positioning themes — Value/Cyclicals over Growth/FAANG, and SMid over Large— and preferred sector positions — Financials, Industrials, and Materials as Full Above Benchmark and HC, Staples, Utilities, and Real Estate as Full Below Benchmark — have not changed. 

Furthermore, I will once again state that equity trading will likely be prone to bouts of volatility in the weeks and months to come.  Hence, if/when they occur, I continue to strongly suggest that investors use relative weakness in my favorable sectors/stocks as opportunities and stay away from the areas that have unfavorable indicators.  The U.S. economy is taking important steps towards reopening nationally as COVID appears headed to the rear-view mirror, which should drive a major corporate profit recovery.  So, STAY THE COURSE and my research continues to forecast that the U.S. equity market will keep climbing the “Wall of Worry” even though there are still increasing levels of anxiety among institutional investors. 

For more details about all my investment views and preferred portfolio positioning, I would like to personally invite you to my upcoming webinar that will be taking place on Wednesday, May 26^th at 3pm.  You can use the following link to register for the event.  I hope you will be able to attend. 

Markets According to Brian: 2H 2021 — Navigating a Challenging Backdrop

Details and Specifics

Date: Wednesday May 26, 2021

Time: 3:00 PM ET

Duration: 45-60 minutes (including live Q&A)

Click HERE to register

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

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

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

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