Big Tech Is Definitely Not Leading Market Rally, So Who Is?

Roll out the banners and pop the champagne.  Actually, let’s not do that yet because this party is only just getting started.   Total market value using the Russell 3000 has now increased $7.6 trillion since inauguration day, but there is still so much more potential.

Russell 3000

Market Breadth

Market breadth had been progressively improving for a more than a week, and yesterday, advancers and up volume were significantly better.   There were still more 52-week lows than highs, which underscores the fact that bad news is still being greeted harshly.

NYSE

• Advancers 1,999
• Decliners 969

NASDAQ

• 2,211
• 821

It’s Not Just Big Tech…

While the headlines will focus on the record high for the Dow and S&P, I love the fact buyers were focused on oversold stocks.  In fact, the big tech names didn’t lead yesterday’s rally, it was a bunch of battered down household names. 

Note: I’ve been including it for a few months, but after today it becomes official, Communication Services takes over for Telecom and this will be a big disruption for sector fund and ETF buyers.

In Communications and out of Technology:

• Facebook
• Google/Alphabet
• Twitter

Into Communications and out of Consumer Discretionary:

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• Netflix

Bottom Fishing

Consumer Staples

This record setting session had several narratives, including which sector would enjoy the best day.  The jockeying lasted into the closing bell when consumer staples pulled ahead with a 1.3% sector gain.  Keep in mind, this sector has been the worst performer of 2018, and it was lifted by some of the biggest individual losers in the sector.

• Proctor & Gamble, which is 13% of the sector, rallied but is still down 22% for the year.
• Philip Morris, which accounts for 8% of the sector, climbed 2%, but it’s still down 7% for 2018.

Value investors are guessing the worst is built into these stocks while technicians are drawn to some of the charts, like the double bottom in Philip Morris.

Materials

The only other sector down for 2018 is Materials, which had a good session lead by Dow DuPont.  I still think there is a lot of value in this sector, and at some point, I wouldn’t be surprised to see it outperform over a longer stretch of time.

Technology

Technology stocks popped nicely, but the names you might expect to be the best percentage gainers weren’t the influencers.   That’s not to say investors didn’t buy Facebook, Microsoft and others, but software and computer chips names enjoyed the biggest upside.

After the close yesterday, Texas Instruments raised its dividend by 24% and issued a $24.0 billion buy back.

Micron beat on the top and bottom line and management stated its shares are undervalued and vowed to ramp up its share buyback program.  The stock has bounced around a lot in afterhours and pre-market trading.

Problem with Bottom Fishing

When bottom fishing, you are buying stocks that could be down because the value proposition has been hit, usually by a string of management underperformance marked by a loss in market share, lack of pricing power, contracting margins and poor execution against Wall Street expectations.

One of my losers this year is United Foods.  Someone asked if they should average down and I didn’t think it was a good idea.  It’s been a major bottom fishing mistake compounded after the close with another revenue and earnings miss.

Conversely, if you are buying a beaten down stock on negative speculation, then you have a greater chance of making big money in a shorter period.   Case in point, dozens of stocks were hammered last year on news Amazon was getting into their businesses, but many turned around big time in 2018 including:

• ETSY +138%
• SFIX +61%
• Wayfair +71%

Today’s Session

When the media says “the market is afraid of tariffs” that was a misnomer.  The correct wording should have been “the economic elite fret that tariffs will hurt margins and send stocks lower.”  That’s just one reason the world’s biggest hedge fund managers have missed this rally big time.  In July, global equity allocation for the 244 fund managers of $742 billion hit its lowest level since November 2016.

As the summer moved along, there was a greater shift into US equities, but the fact of the matter is, the smartest folks in the world that get paid big-time money to be in rallies have mostly missed it – big time.

But they are playing catch up and even less afraid of trade/tariffs. 

Top Three Global Fund Manager Fears:

• 43% Trade/Tariffs (was 57% in July)
• 18% Weakening Chinese Economy
• 15% Central Bank Actions

These fund managers are going to have to play catch up and do it quickly.