In prehistoric times, fear was mandatory. It kept you alive. But today, it’s different. If you have too little fear, you become dangerously daring; with too much, you’ll never progress.
This concept can be applied to the market, as we've seen some people become fearful due to increased volatility. But as readers of this blog know, we've talked about this volatile inevitability.
In terms of the market, it means when everyone is buying, everyone is happy. But as those in growth stocks have known over the last few weeks, when selling takes over, it’s frowny face time.
There's been a monster rotation going on in stocks with an eye on fully reopening the economy. But remember, the market looks forward six months to a year or more, so fundamentals that may not make sense today could make sense tomorrow. That's why last year’s failing companies are suddenly high-fliers. You can see the uptick in “big money” institutional buying in those sectors, like discretionary, financials, industrials, and real estate:
At the same time, we see selling picking up in healthcare, technology, and utilities:
So, does that mean Cornerstone is bullish or bearish? As we’ve stated many times over the past few months, in anticipation of this volatility, we're still bullish long-term, especially as signs now point to a true reopening around the corner.
The market theme that is intensifying is so-called “stay at home stocks,” which are mostly concentrated on technology, are being punished as institutional investors hop on the “real economy ship.” However, we believe any slump in technology would be temporary at best (we’re already seeing it bounce back). The truth is, in today’s economy, technology drives innovation and revenue in every sector. That will not stop, it will only intensify.
We would suspect that as earnings return and growth companies continue reporting phenomenal numbers, growth stocks will attract capital again. This is not the type of selling that would crash the market, it's merely market volatility from an exhausted market.
Additionally, stocks have been generous, to say the least. For example, the NASDAQ pulled back roughly 10 percent from its February 16, 2021, peak. If it were to fall another disastrous 10 percent more, meaning a total of 20 percent from the peak, it would still be up 60 percent from the trough. The tech-heavy NASDAQ, in essence, lifted the entire market on its back for a troubled year. It’s now just getting a well-deserved break.
So in the short term, what should we expect as markets appear weaker?
If we look at MAPsignals’ trusty Big Money Index (BMI), which measures institutional investing activity, it is signaling lower prices ahead as selling drags it down, although we saw a small pickup in the BMI late last week due to a slowdown in selling:
How long should we expect this to continue? You can see in the below chart how when red comes in, meaning a sustained period of a lowering BMI, it tends to last for a little while. This corresponds to a falling, then recovering index. As the red arrow to the right indicates, based on historical perspectives we are just beginning the period of a sustained, lowering BMI:
This red phase started on March 4-5, 2021, and historical averages suggest we should expect lower prices in the coming weeks. Going back to our beginning of the year predictions, this would coincide with an early April low. The only caveat is the market's appetite has been so strong lately that the “down time” could be much shorter, and we could wake up to higher prices earlier than expected.
This is illustrated below in last week’s slowdown of selling in growth stocks (although not an increase in buying yet):
For now, the data suggest we're due for more volatility. That’s consistent with our outlook of choppy waters ahead in the near-term and growth later in the year as recovery and reopening continue. But the slowing of selling, especially so quickly, is a good sign. This volatility is normal, and along with sectors rotating regularly from “favorable” to “unfavorable,” is all a byproduct of healthy market activity. It should not be feared.
Looking forward a bit, we believe the snap back will be fast and intense. Remember, interest rates are low, stimulus is on the way, and there are hardly any other places to put your money besides stocks to achieve reasonable or compelling gains.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial Services, CoreCap Investments, and CoreCap Advisors are separate and unaffiliated entities.