President John F. Kennedy said, "Those who dare to fail miserably can achieve greatly." It should be the mantra for those who choose to invest in the financial markets. The image of easy success making money poolside is the dangled carrot, cruelly portrayed by brokerage advertisers. We all know that the market is fraught with danger and difficulty. Last year's finish was testament enough of this fact. Making money in the market is hard … unless of course you have an edge.
Some edges are from expertise or lifelong careers built on experience. Others can be less savory. While JFK was a tragic and beloved historical figure, it may surprise you to learn that his dear-old dad built the family fortune on insider trading. In 1919, Joseph P. Kennedy joined the brokerage firm Hayden, Stone & Co. and quickly became an expert in the then unregulated stock market. He used tactics that are now considered insider trading and market manipulation.
Among other things, he bribed reporters to spread stories in an information-starved age of stocks to drive prices up for his investment pool. He also participated in organized "bear raids" to crush prices when he was short. He supposedly said that it was time to get out of the crazed speculation-fueled market when he got stock tips from a shoe-shine boy. He then shorted heavily in 1929 and made a fortune worth $4 million (about $60 million in today's dollars). He then invested heavily in real estate and grew his wealth to $180 million (about $3.4 billion today).
As if all that wealth wasn’t enough reward for insider trading, President Franklin D. Roosevelt made Joseph Kennedy the head of the Securities and Exchange Commission (SEC) from 1934 to 1935! When asked why he did it, FDR said, "Set a thief to catch a thief." Kennedy went on to outlaw the very practices that made him rich.
While we're on the subject of profiting handsomely from the market, let's focus on the right way. Since Jan. 4, the market has rocketed higher with only a glance or two backwards. Looking below, you can see that the major indexes' one-month performance looks more like what you would expect to see for a 24- or 36-month performance. The small- and mid-cap space got most of the love.
This is consistent with what our data shows us – of all the signals we are seeing over the past 14 trading days, 81% are buys! While this is not sustainable forever, our MAP-IT ratio just popped over 50%, and a recent study we put out showed that this is very bullish for one- to twelve-month forward returns.
The strongest sector index performances for one month belong to consumer discretionary, energy, financials and industrials. The least strong sectors were consumer staples and utilities. Se we are definitely witnessing a one-month rotation out of defensive sectors and into some growth. The real winner here, as we'll delve into more detail in a sec, is the PHLX Semiconductor Index (SOX), which has rocketed 18.6% in a month!
However, last week showed a little slowing of momentum, but only at face value. What we actually see is strength under the surface. While real estate and utilities saw a decent pop this week, the average return for all 11 sectors was flat. This is one of those times when drilling down a level further is fruitful. Once again, we see strength in semiconductors at +4.3%!
This makes sense. I believe that traders were heavily short semiconductors. We saw a ton of selling late last year. But now, we see companies like Skyworks Solutions, Inc. (SWKS) and Apple Inc. (AAPL) guide down only to see their stocks recover quickly. For instance, in Tim Cook's letter to investors on Jan. 2, Apple guided down citing lower-than-expected phone sales. Obviously, this hit Apple stock, but it also pressured semiconductors and Apple suppliers.
However, Apple stock is now back to where it was before it got all negative. Notice how buying picked up significantly late this week in semis: top names in the space were stocks like Xilinx, Inc. (XLNX), Ciena Corporation (CIEN) and Lam Research Corporation (LRCX). Lam Research came out and reported solid earnings but announced a $5 billion-dollar buyback. This is significant given that Lam Research has a $22 billion market cap, so it sent the stock up in a big way.
I believe that the negative sentiment in the news is getting shrugged off more and more, so as the market moves into more of a bullish tone, I expect to see more upbeat headlines. That's when you should be watchful, as eventually we will have to sell off. But what we see here is that clearly unusual institutional buying is picking up and is focused on some growth-sensitive areas like semis and discretionary.
The fear is dissipating after the massive washout last year. As I've written a lot, I'm confident that was indeed just a big ugly hairy washout due to forced selling by exchange-traded fund (ETF) managers. I think we are moving into a new phase of the bull market that is more selective. The headlines are still rife with uncertainty over trade, government shutdowns and North Korea, to name a few. These stories have successfully kept the Mueller investigation out of the news, until Roger Stone was dramatically arrested at his home in Fort Lauderdale. The truth is, right now, the market doesn't seem to care about the same stuff the way it supposedly did last fall and winter.
As we move out of the darkness, we will continue to bring you where we see the market and what it may mean going forward. Right now, buyers have firm control once again, and we foresee higher prices. JFK's dad made his loot breaking rules that weren't written yet, only to become the one to write them. But either way, his son was a pretty prolific guy. The current state of the market makes me think of another one of his fitting quotes: "We are not here to curse the darkness, but to light the candle that can guide us through that darkness to a safe and sane future."
The Bottom Line
We continue to be bullish on U.S. equities. We see the year-to-date lift in stocks as very constructive. As growth stocks gain on increasing volumes, we believe that earnings season could be better than overall expectations.
Disclosure: The author holds long positions in Skyworks Solutions and Lam Research at the time of publication.