Sharks are pretty much always hungry, and they love blood: that's no secret. But the smell of blood makes them hungrier. It sends a message to the brain saying, "Eat and eat now!" Although sharks are solo diners, blood can lead to a feeding frenzy that can even cost sharks their lives as they battle for food uncontrollably.
In the world of the stock markets. September saw a feeding frenzy for some sectors, and October didn't start off much better. While the market is just off its highs, it was a volatile week for the S&P 500.
It was encouraging to see the market rally back Thursday and Friday. The good news is the S&P 500 finished the week down only 0.33%. That bad news is the rally was on lower volume and that the pain was concentrated and seen elsewhere. The Russell 2000 finished down 1.3% for the week, followed by the Dow Jones Industrial Average (DJIA), which ended the week down 0.92%.
Upon closer inspection, we see that the weakest sector by far was energy. This makes sense given oil's brutal week. West Texas Intermediate (WTI) crude fell nearly 5.7% last week. The Dow Jones Transportation Index was ugly too, down 3.01%. Financials, industrials, and materials were all weak, with each declining worse than 2.2%.
The bright spots weren't many, but there was one: growth. Looking at the index table below, the standout was the PHLX semiconductor index. It's still the leading index since Christmas Eve lows last year, but it was under pressure for quite a while until lately. It caught a big bid this past week, rallying 2%. The Nasdaq 100, Russell Growth, and Nasdaq Composite indexes were all strong last week. Looking at the sector indexes, information technology was a standout best performer with a 1.11% gain.
The news looks bad on the surface with a weak week, but things look decent one layer down with growth rallying. But what does big money say? As you know, I gauge market strength and weakness based on what I believe big money investors are doing. More good news/bad news: the good news is that the market is still only 2.4% away from all-time highs; the bad news is that institutional investors are still selling.
The heaviest selling last week continued to be health care and tech. Industrials also saw big money selling. Telecom saw selling as well, but remember, this is the smallest sector, somewhat based on the S&P Communications Services Sector Index; ours has only 24 stocks in it.
Let's look at where the real pain was. Once again, software took a drubbing, seeing 34 sells out of info tech's 47 (72% of the universe). Biotech and pharma saw 41 sells out of health care's 69 (59% of the universe).
The real question is: "what's going on?" Frankly, many of the best hedge fund managers may be asking the same thing.
An article in The Wall Street Journal shows that some of the best managers out there got absolutely mauled in September: "Several technology-focused funds were among those hit hard. Tiger Global Management LLC, a hedge fund founded by billionaire Charles 'Chase' Coleman, lost 7.4% last month, said people familiar with the numbers. Philippe Laffont's Coatue Management LLC lost about 6%, Whale Rock Capital Management LLC dropped 14%, and Glen Kacher's Light Street Capital Management LLC lost around 10%..."
The article cited significant negative hits to popular momentum trades: stocks being bought because they are going up. These would logically be many of the tech names logging sell signals for us. When reversions happen, they come swift and hard. This is what we have seen in software for a few weeks and health care more recently due to fears of a nomination for health care industry-unfriendly Elizabeth Warren.
As for how long this selling persists, when it hits the papers, it's usually near the bottom. That said, I don't think we are out of the woods yet either. We saw buying on Friday but too little to get excited about. And this selling is nothing close to capitulation.
However, on the bright side, the worst is likely behind us, and if I'm forced to call it, we are likely in the bottom of the seventh inning for this high-beta selling. A stock that swings more than the market over time has a beta above 1.0. And the stocks that were the biggest winners are all getting hit hard.
What I will say is this: personally, I moved a slug of money into one of my longer-term accounts to start buying some beat-up prior high-flyers. I looked for stocks with superior fundamentals and weak technicals to serve as buy candidates. Companies with monstrous sales and earnings growth, rich profit margins, and low debt didn't all have simultaneous sudden change of circumstance with one exception: they got sold hard.
At my research firm, we still believe that many funds got caught wrong way in September and were forced to sell big winners to pay for losses on wrong-way short bets. When big money needs out quick, prices gap down. When that happens in the modern market, the algo-traders smell blood in the water, and then the real moves begin.
The most important fact is that one person's misfortune is another person's opportunity. Buying illogically priced assets under distress is a long-term winning strategy to find those opportunities. Just ask our friend Warren Buffet. Or Winston Churchill: "A pessimist sees the difficulty in every opportunity: an optimist sees the opportunity in every difficulty."
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.