Markets hate uncertainty. And the more that uncertainty is removed from the equation, the happier markets are.
The presidential election helped relieve some of that uncertainty. In the three trading days after the election, the S&P 500 rose almost 2%.
But the one-two punch of vaccine news seems like the real relief markets were craving. In the week following Pfizer’s vaccine test results on November 9, the S&P 500 tacked on another 1% and put it at a new all-time high. Today, Moderna came out with even more encouraging vaccine test results… and the market’s responding accordingly.
With this outpouring of relief, one would think that all stocks are set to benefit. But that turned out not to be the case.
In today’s issue we’ll take a close look at what’s happening under the hood… Whether the “value rotation” has legs… And give you a few ways to play the moves I see coming.
Looking Under the Hood of the “Value Rotation”
Last week marked a massive rotation out of high-flying growth stocks and into the value names that were neglected all this year.
All the unloved stocks since COVID began – energy, transport, and financials – were suddenly on fire. And by the close, “stay at home” stocks got dumped.
That was the narrative you’d hear from mainstream media talking heads. But when I invest, I prefer to use data above all. And specifically, my proprietary market-reading system.
You see, I monitor 5,500 stocks for unusual patterns daily. Only a small group of those pop up on my radar each day. In fact, over the past 10 years, an average of just 497 of those 5,500 stocks produce an unusual pattern. We can think of these as “yellow flag stocks.”
Out of those, an average of 66 are buy signals (green flags), and 34 are sell signals (red flags). So from 5,500 stocks, only 9% trip the model as big-money signals, and only 20% of those become a buy or sell.
When markets meander along normally, my analysis focuses on buy and sell signals. They tell us which sectors and stocks big money is piling into.
But when big rotations happen like we’re seeing now, useful information is hidden in which stocks trip the model: the yellow flag stocks.
On Monday, three times more stocks tripped the model than what’s typical. And Tuesday saw over two times more stocks trip than normal. All this happened while selling was muted across the board.
If you’ve been reading my work for a while, you know that big money is most often attracted to growth companies. So if growth got dumped, where are all the sell signals? And why are we seeing so much more buying than usual?
The answer is simple: My system measures buying vs. selling in all stocks. Growth stocks have led the market higher for months. So, when they get sold, it takes a lot to generate a big-money sell signal.
The point is… the pain in growth and tech stocks right now isn’t alarming. They’re just giving back some of their gains after a long rise. And overall, the appetite for stocks is strong.
But we do see a sudden buying uptick in previously unloved sectors: Discretionary, some healthcare, industrials, materials, and real estate.
But I believe jumping on this rotation is premature. Here’s why…
Not Out of the Woods Yet
Pfizer’s potential vaccine is exciting. It may finally bring the world out of this pandemic and back to normal. But investors clearly got ahead of themselves last week.
The vaccine isn’t FDA-approved yet. Distributing the vaccine will be difficult, as it needs to be stored at -70 degrees Celsius. Most medical facilities aren’t equipped for that, at least not at scale. Lastly, the vaccine must be administered in at least 2 or 3 stages for each patient.
So, even if the vaccine were rushed through the approval process and was somehow widely distributed on the fastest schedule imaginable, the general public still won’t have it anytime soon. The more likely scenario is, unfortunately, another lockdown.
State governments in California, Michigan, Oregon, and Washington have already announced new lockdown measures. I think this is just the start of something more widespread – if not as intense as the lockdowns in March.
That means all these suddenly hot stocks – like airlines, travel, energy, and financials – will have trouble making money for at least a few quarters.
Overall, this rotation is overdone and premature. It screams of hedge funds scrambling to get out of growth and into value.
Once reality sets in, tech and growth stocks will quickly become market-leaders once again.
The Long-Run Winners
Money is rushing back into stocks, as the biggest question of the year is behind us. The growth/value rotation is a knee-jerk reaction to vaccine news. It is causing pain in leveraged hedge funds caught on the wrong side of the trade.
Growth stocks will continue to power markets higher. The current selling could last days or months… no one knows. But I am still certain growth stocks are long-run winners you want to be in.
With election and vaccine uncertainty all but off the table, it’s time for investors to start buying high-growth companies – with the plan to hold them for years.
For investors looking to gain broad exposure to high-growth sectors, tech or otherwise, look to the iShares Russell 1000 Growth ETF (IWF). This ETF invests in the best high-growth companies in the U.S., no matter what sector they’re in.
For any investor looking to take advantage of the recent lower prices in growth, that’s a good place to start your search.
Patience and process!
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Jason Bodner
Editor, Palm Beach Insider