Today, I have a little thought experiment for you…
Say you wake up one morning and your refrigerator is busted. You need a new one, fast, so your food doesn’t spoil.
You hop on the internet and start your search. You read reviews and watch videos. Research measurements and depths. Compare features and prices… even colors.
You visit multiple stores. Talk to salespeople. Finally, you narrow it down to three models. But then you return to the internet for more in-depth reviews, just to be sure.
Only after all that deliberation do you pull the trigger. Of course, you didn’t want to just jump into a huge decision like that. You wanted to know the best value before you committed.
All told, you spent a week researching this new purchase – and wound up throwing away a ton of food. Not to mention all you spent on takeout for the family.
At the end of it, you wind up with $2,000 less than you started with.
Now: How much time do you spend researching a stock you’re going to buy?
Impulse Control
The great irony I realized years ago is that the things that can make us rich… we generally pay the least attention to.
Having the perfect refrigerator won’t make you rich. Picking stocks that go up 2x, 3x, even 10x or more will. So why do we spend vastly more time researching appliances than we do on investments?
It’s a fascinating phenomenon, but a real one. The mind focuses on the small gratifications but leaves the big ones up to chance.
This brings me to market shocks… and getting shaken out of great stocks when things get rough.
When the 2020 presidential election reached its conclusion, several COVID-19 vaccine announcements immediately followed. The stock market looked like a Space-X rocket launching. Every stock was up.
But a nasty pattern emerged: the rotation out of growth stocks into value stocks.
Companies battered by COVID looked to benefit from the country reopening after widespread vaccination. Big tech and growth stocks were suddenly out of favor as, hypothetically, every American might be back on planes, eating at restaurants, shopping at malls, and enjoying the good old life by Christmas.
It’s clear to see in the Russell 2000 index – full of small-cap and value stocks. It’s up 16% this month vs the tech- and growth-heavy NASDAQ’s 8.6% gain. That’s nearly double.
Suddenly… “stay at home” stocks looked like old news. Many who owned these great stocks must have looked at their portfolios bleeding and started wondering: “Is their time over? Should I sell?”
I’ll bet that those who answered yes will be kicking themselves years from now…
A Forced Rotation
You see, the massive rotation we saw was likely caused by a mini-“quant-quake.” Before the vaccine news, quantitative traders crowded into growth stocks and bet against value stocks.
When you add leverage to that equation, and get a hairpin turn in the opposite direction… you get a mad rush to flip the trade around.
When these quant traders were forced to sell growth stocks because they were falling… and cover short trades against value stocks because they were rising… the very move that caused all this chaos only intensified.
The takeaway here is that the market rotation was less about a sudden love for value stocks… and more about quant funds being forced to reverse their positions.
But it’s key to not lose sight of the big picture. And that picture is: big money has not stopped buying.
Last week saw another huge week of stock buying, across all sectors…
| Sector | Number of Stocks | Buy Signals | Sell Signals | % Bought | % Sold |
| Technology | 232 | 104 | 16 | 45% | 7% |
| Materials | 89 | 55 | 12 | 62% | 13% |
| Discretionary | 193 | 153 | 5 | 79% | 3% |
| Industrials | 163 | 90 | 0 | 55% | 0% |
| Financials | 188 | 113 | 0 | 60% | 0% |
| Communications | 26 | 13 | 1 | 50% | 4% |
| Staples | 113 | 49 | 8 | 43% | 7% |
| Healthcare | 213 | 57 | 16 | 27% | 8% |
| Utilities | 44 | 16 | 0 | 36% | 0% |
| Real Estate | 108 | 78 | 2 | 72% | 2% |
| Energy | 61 | 51 | 0 | 84% | 0% |
In my research, I found that each sector saw unusually large buying in over 25% of the stocks I track within them.
The fact that big money bought value more aggressively than growth doesn’t mean you should rush to sell growth stocks. In fact, I’d argue that you should look for deals in that space on any weakness.
Be a Big-Picture Thinker
Focusing on quick trades and chasing market narratives is like focusing on a new fridge instead of your portfolio. It consumes your time and energy, and you wind up with less money in the end.
Picking stocks with excellent sales and earnings growth being bought by big money – and holding them through thick and thin – is the real recipe for long-term success.
Patience and process!
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Jason Bodner
Editor, Palm Beach Insider
P.S. My Palm Beach Trader subscribers don’t sweat market rotations…
Because they know we always find the best stocks in the market – no matter what happens next.
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