"Houston, we have a problem." This now-famous phrase was immortalized in the movie "Apollo 13." The ill-fated space mission was the seventh manned space mission of the Apollo program and the third that was supposed to make it to the moon. But two days after launch, an oxygen tank exploded and crippled the spacecraft. Against impossible odds, the crew of three returned safely to earth six days after launch.
Now, the method that got them home was a bit of classic momentum. They performed a slingshot around the moon – a gravitational assist maneuver. They used the gravity of the moon to sling them around and hurdle them back toward earth.
This method, while ingenious, may not have come from NASA itself, but from a hippy MIT grad student who called to offer his idea. This bold claim supposedly came from the ex-deputy chief of media relations during the time. Apparently, after meeting the long-haired guy, the space agency withdrew its invitation to present him to the president and public. (And the sign said, "Long-haired freaky people need not apply.")
The power of momentum is immense and shouldn't be underestimated. The same gravitational slingshot effect has actually been observed at the center of the Milky Way galaxy. A supermassive black hole with a mass billions of times greater than our sun is literally flinging stars around it like toys. UCLA astronomer and professor Andrea Ghez did a 10-year time lapse observing stars doing exactly this at the center of our galaxy. You can see it here, and it still gives me goosebumps.
In the depth of the market's December despair, many thought we were headed way lower. The pessimism resembled what many believed as it became clear that the Apollo 13 astronauts were drifting away from earth and closer to certain doom. Yet momentum slung them back to earth. So, is it really surprising to find that the pendulum swung so wildly from bearish to bring us so far back so quickly? Many news headlines hit recently saying that this January was the best since 1987. This seems wild considering we came from a December that was the worst since 1931.
Yet here we are, and I ask: "Where have all the bears gone?" The headlines in December were soaked with the words "bear market." Websites were chock full of stories making all sorts of comparisons to 2008 and to the Great Depression. In retrospect, it was clearly out of hand, but then it was getting buy-in from the masses, and the fear was spreading rampantly. Where are those stories now? Where is the dread of global growth slowdown? Where is the doom and gloom?
This is just a classic example of emotion and fear gripping hold of the market, only to give way to relief and complacency. But what's really going on here? We have already gone into terrific detail of how we believe that exchange-traded funds (ETFs) were the main suspect in causing the calamitous selling of late 2018. If you haven't seen it, I wrote an exhaustive white paper on the subject for Navellier & Associates, which can be found here.
But now that we have the all-clear and selling is done, we have witnessed a seismic shift – so much so that our ratio of buying to selling has skyrocketed from oversold (25%) to 72.5%. In four short weeks, we have seen hardly any selling signals and an abundance of buying. The algorithms have clearly reversed course as their eternal thirst for mean reversion is getting quenched.
What sectors have been leading the charge? We have seen a lot of buying in information technology and consumer discretionary. The financial sector has also seen a monstrous recovery from being grossly oversold. This is bullish when we see buying in these sectors on such a scale. These are growth-heavy sectors and decidedly "less defensive."
It's worth noting that, even if this has been a monster short squeeze, it bodes well for the future. Forget for a moment that we did extensive research into 17 prior periods of sustained selling over the past 30 years. Forget for a moment that research showed us that, more than 80% of the time, one- through twelve-month forward returns were positive for the market. Forget those things. If shorts are covering and bears are running, that's a good sign. That said, we are cautious of the skewed buying.
This January effect was highly pronounced. Investment managers needed to deploy capital at the start of the year. This may have started the snowball rolling, but as we cap off the best January in more than 30 years, the setup is encouraging. Sales and earnings appear to be "not as bad as we thought."
Semiconductors, the scapegoat whipping-boy industry sector for 2018, are showing some stellar earnings and also displaying monstrous buying. This crowded short saw momentum slingshot around the moon to be positive. This also foretells of opinions that global growth may not be as bad as previously portrayed. One other thing to notice in the current climate: negative news isn't working like it used to. Last year, negative stories morphed into instant fear and redness in the market. At the moment, it's just not working like that. Now liquidity just needs to keep returning to the market.
Our opinion was that the market backdrop was not as bearish as the popular opinion had become. We said that the market would bounce and move into a more selective phase of a bull market. Our view was unpopular for a few months as the market went south, but we read the signs that we saw.
The Five Man Electrical Band had a great hit in 1971 in which they sang, "Sign, sign, everywhere a sign. Blockin' out the scenery, breakin' my mind. Do this, don't do that, can't you read the sign?" The thing is, sometimes people don't want to read the signs. They just want to believe what they want to believe.
The Bottom Line
We continue to be bullish on U.S. equities. We see the year-to-date lift in stocks YTD as very constructive. As growth stocks gain on increasing volumes, we believe earnings season could be better than overall expectations.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.