The market had a give-back week. Is it sick or just playing dead? You've heard of a possum "playing dead." I thought it was some voluntary thing it did. If threatened, it falls over and stares into space. It goes limp, stops breathing, discharges its bowels, sticks out its tongue, and drools. Poking it won't make it budge. It appears dead, falling into a fear-induced catatonic state.
"Playing possum" isn't an act at all. When it happens, the animal feels no pain and has no reflexes. The marsupial won't respond no matter what is done to it – whether it is swatted, bitten, or its bones are broken. Many animals don't like dead prey, so they give up and move on.
So, is the market about to roll over, or is it just playing dead? Let's start with last week's performance:
It's ugly on the surface. But let's see what really happened. Looking at the various indexes above, you'll see defensive sectors collecting capital. Real estate, utilities, energy, and health care were the only positive ones. Your first thought might be: this is a risk-off, safety-on rotation. But looking closer, you might notice a trend.
Growth clearly outperformed value, and the S&P 500 outperformed the Dow Jones Industrial Average. Yes, the growth-heavy Russell 2000 index was the weakest of the big U.S. indexes. But within Russell, what happened? Once again, value stocks were much weaker than growth.
And what about that flight to real estate and utilities? Well, let's not forget that the Fed cut rates by 25 basis points. Traditionally, rate cuts are good for stocks. But the market wanted more, so investors "sold the good news."
When rates go down, investors look elsewhere. The utilities and real estate sectors typically offer high yields. Utilities are safer stocks with a strong dividend history, and real estate stocks, specifically real estate investment trusts (REITs), are legally required to distribute between 75% and 90% of its profits in the form of a dividend.
The devil's in the details, and the index detail shows not much to worry about. You know by now that the next place I usually look is to see if there was a lot of big money selling. Last week was a whole lotta nada when it came to selling, so I'm not worried. In fact, there was healthy buying under that weak market surface. There were 193 buys and 59 sells – more than 3:1. Have a look:
Financials saw buying despite a -1.00% sector index performance. Health care, energy, utilities, tech, industrials, and real estate all saw respectable buying in a weak-looking tape. And when the market looks sick, we should see selling. I don't see anything noteworthy at all.
"But wait!" you say, "If there's a sore spot on that index table, it's semiconductors. I mean, look at a that: -2.66% in a week. Yuck!" However, before you get down on semis, let's have a look there. The PHLX Semiconductor Index sank for sure, but that space has seen a lot of buying recently.
In fact, a technology, media, and telecom (TMT) fund trader asked us to look at where the big money was moving in and out of the sector. We did a detailed report for the past two weeks of activity down to the stock level, but the quick and dirty is summed up in this table:
First, you'll notice there are more buys than sells the past two weeks in TMT. You'll also see a big rotation out of software and into semiconductors. The outlier selling moved right out of software to semis. This is profit taking in a crowded industry group long. That money was moved into the group that was under pressure for a while.
Finally, there's the trusty Big Money Index. It looks at big money moving in and out of stocks for the whole market smoothed over time. It helps us get an idea of the trend of investment in or out of the market by the biggest investors out there. Well, that thing bounced hard off a key level. Usually, when the index falls below 45%, we can expect lower market prices. Well, talk about a head fake: it has rocketed to 64.5% in a very short time. That means one thing and one thing only: big money is buying stocks – fast.
What looks like a soft market to some looks like a pause to me. I think the market is taking a breath before a leg higher. The global equity climate still places the United States firmly as Best in Show. Rates continue to plummet, and equities are becoming even more attractive. There's nowhere else to go.
Peter Lynch managed the Magellan Fund at Fidelity Investments between 1977 and 1990. He averaged a 29.2% annual return, consistently more than doubling the S&P 500 market index and making it the best-performing mutual fund in the world. While there, assets under management went from $18 million to $14 billion. He probably knows a thing or two about stocks. He said: "The real key to making money in stocks is not to get scared out of them."
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 no positions in any stocks mentioned at the time of publication.