The past few days were an emotional roller coaster. My good friend beat an 18-month battle with leukemia only to succumb to pneumonia weeks later. The next day, my family enjoyed a massive party for two of my sons. We were filled with joy and pride.
Naturally, the DJ played "We are Family," the Sister Sledge hit from the '70s. Everyone knows the song played at weddings and parties around the world. Composed by Bernard Edwards and Nile Rodgers, it was actually initially declined by Atlantic Records. These guys went on to found the group Chic, whose song "Good Times" is one of the most copied pieces of music in history. The song's bass line was an inspiration for Queen's hit "Another One Bites the Dust."
Edwards and Rodgers went on to produce tons of music for major stars in the '80s, including Dianna Ross, AC/DC, Rod Stewart and many more. Edwards died just after a performance in Tokyo with Rodgers – the cause was also pneumonia.
Life is amazing; sometimes things just line up and come full circle. My weekend of joy following a week of tough news was summed up with one mega successful 1979 hit. Personal try-and-fails were echoed with the initial rejection of the song. It captured the joy of my family celebration. It was tainted with the same tragedy that got my friend in the end. A full-circle emotional journey in a short time.
When I heard that my friend passed Thursday, the market was having a bad day. Anxiety was sweeping the Street. Trade tensions made people nervous, and popular longs were unwinding. It was a cruddy day, but in the end, it gave perspective.
I suddenly didn't care about ugly price action. The emotion of the moment wasn't getting the better of me. I was able to focus on the important things: happiness, humility and thankfulness. I also realized that, because I had suddenly stopped fretting about the market and news volatility, I could relax in one notion that we have at my research firm: TAGU.
When we began our infatuation with great stocks, we watched some of them for years. We sifted through to find the best traits: solid fundamentals of strong growth, technical strength and institutional support. But one thing about great stocks became shockingly clear. THEY ALL GO UP! TAGU!
Seriously, the best companies continue to be great. These are the outlier stocks. They weren't brought down by the dotcom bubble bust, Sept. 11, recessions or even the financial crisis. Sure, there was temporary price pressure as nervous investors fled, but eventually, they all went up!
What I am saying is this: don't freak out about the trade news. TAGU! Don't worry about walls, or politicking or inflation. TAGU! The trick is knowing which handful of stocks out of the thousands have this resiliency. Stocks have gone up for 100 years, but only 4% of stocks account for 100% of the net gains above Treasuries during that time. (Check out "Do Stocks Outperform Treasury Bills" by Hendrik Bessembinder.) If we own TAGU stocks, we can stop worrying, turn off the noise and focus on data.
Risk-off was clearly in energy. West Texas Intermediate (WTI) crude oil fell 6.6% last week. We see that ugliness echoed in the S&P 500 Energy Index, which fell 3.5%. Transports were down as well.
Recent selling was focused in sectors or groups, but last week saw gentle selling across all groups and market caps. However, focused pain points were energy and semiconductors. Semiconductors had been the top performer since New Year's. The PHLX semiconductor index fell another 2.5% last week as China trade chatter caused traders to target semiconductor stocks.
Wall Street shoots first and questions later. I believe that this profit taking will give way to some near-term pessimism. But semis are the place to be in the long term. So have your TAGU shopping list ready – deals are out there!
When we look at unusual institutional selling, we see that tech logged a bunch: software and semis saw many sell signals. Consumer discretionary saw the most selling, led by specialty retail and autos. Metals and mining stocks, oil and gas stocks, and biotech also showed focused big selling.
I believe that we are in a phase of profit taking. After a major run-up, the latest trade news is a perfect chance to take some chips off the table. Sales and earnings for Q1 were strong, and this is just a mini-replay of the last two times we saw a market reaction to trade war tactics. One thing is clear: the market doesn't like it. But don't worry, because TAGU.
Listen to Nile and Bernard of Chic: "Good times, these are the good times / Leave your cares behind, these are the good times / Good times, these are the good times / Our new state of mind, these are the good times."
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. We expect unusual selling to slow in the coming weeks, thus creating a buying opportunity.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.