The stock game is a fast-money, quick-in-and-out game. Or at least that's what CNBC wants you to think.
The boring truth is that you make big money in the long game. The examples of decades of growth are unsexy, but they work tremendously well. Consider this: in 1951, Walt Disney hired a maid named Thelma Howard and gave her shares of The Walt Disney Company (DIS) stock each Christmas. When she died in 1994, she had 192,000 shares worth $9 million. She left the majority to her foundation supporting disadvantaged kids.
So the near-term moves that grab everyone’s attention will look like little noise in 30 years. We'll delve into them anyway … The broad indexes had a solid week. Interestingly enough, the strength is in growth. The NASDAQ and Russell 2000 outpaced the S&P 500 and weaker Dow Jones Industrial Average.
Sector wise, we are seeing strength in energy, which is likely due to oil's rally and short covering. Crude oil had a +5% week as of this writing. As for energy stocks, the sector is clearly the weakest by far since the bottom was put in Dec. 24 of last year. Other bright spots have been in health care and industrials.
Industrials and financials were also strong, but the real story is tech. The surface 2.5% gain showing for the week hides the continuing story. The markets hate software and love semis. Last week saw a swath of strong earnings across the semiconductor space. Semis are seeing major buy activity.
The report out of Lam Research Corporation (LRCX) was a showstopper. Its guidance is suggesting that the up-cycle is near for semis. This is not to mention Intel Corporation's (INTC) report. Wall Street has been so behind the ball on this group, and it shows with all of the upgrades. Likely, analysts were focused on software's woes. This helped fuel a 3.7% rally in the PHLX Semiconductor Index (SOX).
This action was somewhat mirrored in our signals. The big buying last week was in utilities, real estate, industrials, discretionary, financials, and materials. So far, there has been no notable selling minus tech. Info tech is the spot where the most selling has been. Where? You guessed it: software. In fact, 31 of the 40 sell signals were in software stocks. The group continues to be the weakest of late as money rotates out of software and into semis.
As for what's coming for the market, we are bullish for good reason. Not only is money pouring into prior unloved sectors, but sales and earnings are off to great start. Out of those S&P 500 companies that have reported, 80% beat earnings and 64% beat revenues. That's juice.
Another reason is that the Big Money Index is ready to lift again. The two-week average is 69%, compared to the five-week average of 51%. What this tells us is that buying is gaining and that prior weeks of weakness will start to roll off. This is bullish activity. Look how the Russell 2000 is coiled up along with the BMI: it looks ready to vault.
"But a tight coil can mean lower prices ahead soon!" you say? Well, I beg to differ. Our ratio of buys to sells has been shifting. That alone will shift the BMI higher, which usually means higher prices.
And look at the following chart. It's the Russell 2000 charted against the net buys and sells daily for the past year. So, if there were 100 buys and 50 sells the net for the day would be 50 – a positive number which appears green. Then negative numbers appear red. Notice how, when red piles up it precedes lower prices. When green piles up, it precedes higher prices. As mentioned above, the two-week average is higher than the five-week average – and rising. That means buyers are here.
Earnings season is here and is largely working. Buyers are back and are taking control. Rates are low, and equities continue to be a better place to put your money compared to bonds. Before- and after-tax returns of the S&P 500 dividend yield are better than 10-year Treasuries.
The news media headlines prove once again that it's all likely a nothing-burger. Impeachment, Brexit, Hong Kong – the whole lot. The market doesn't care, and it's looking upward. To me, it's looking like higher market prices are ahead.
The short game is fun and gets a lot of attention. But time and time again, success is proven to take a long time. Steve Jobs said "…if you really look closely, most overnight successes took a long time."
The Bottom Line
We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Weak markets can offer sales on stocks if an investor is patient.
Disclosure: The author holds long positions in Lam Research and Intel but no positions in the other stocks mentioned at the time of publication.