Is The Market Near A Breakout?

Once again, the stock market exhibited resolve - and at the same time, fragility as the rally ran out of steam into the closing bell on Tuesday. Outside of those half dozen monster growth stocks and new momentum darlings, big-equity indices were finding trouble maintaining footing. However, early efforts to gain traction usually fail midday, and then it hangs on into the closing bell.

Meanwhile, the NASDAQ has soared to all-time highs; quietly, the Russell 2000 has gone up big since the June 11^th drubbing.

Although the market faded in the final hour of trading, only one sector turned negative. Consumer Staples joined the other sectors that are usually seen as shelters in down markets or periods of uncertainty.

Investors Got Spooked

Fund flow trends have been very revealing.  There were five consecutive weeks of net outflows from money markets after 11 straight weeks of inflows (money mostly shifting to bonds), resulting in 10 straight weeks of inflows into taxable-bond funds.

The $35.8 billion in money market outflows brought the five-week total to $98.2 billion, which is a drop in the bucket compared to the $1.1 trillion accumulated during the 11 weeks of inflows.

Investors Put a Toe in the Water

After pulling cash out of equity funds for weeks, investors piled $20.4 billion in the week of June 10^th, perhaps sensing a major breakout was in the offing. When they got that huge selloff instead, they moved back to retreat mode and pulled out $25.5 billion last week.

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Cash to fuel a potential breakout is not an issue…getting that cash off the sidelines is the challenge.

To see the chart, click here.

Bifurcated Market & Opportunities

You often hear the term “stock picker’s market,” which means winners are significantly outperforming most of the market. That has been the story of 2020. While it suggests a lot of opportunities, it also reflects a fact that you must be in the right names for outsized gains.

• 142 winners: average gain +15.89%
• The top 20 winners: average gain +47.89%
• 363 losers: average decline -21.60%
• The bottom 20 losers: average decline -56.60%

The Message of the Market

The market is so close, and yet so far away from the kind of breakout that changes everything. Taking out those June 10^th highs (June 8^th for the Dow) forces a lot of fence-sitters with tons of money off the sidelines, but it must happen soon.

A big standout in yesterday’s trading was Kansas City Southern (KSU), a favorite of mine that was talked up in the takeover rumor mill. The stock rallied 1.44% on 2.5 million shares, which is a million more than the usual change of hands.  This rumor is credible since this is the smallest name of the major rails, which has somehow craved up North America in such a way that there are little crossings. 

The of the dominate rail companies are KSU, UNP (Union Pacific), and NSC (Norfolk Southern).

• KSU serves a ten-state region in the southeast and Midwest regions. During Q1, chemicals and petroleum revenues increased by 18% primarily because of increased refined fuel products and liquid petroleum gas shipments to Mexico. Intermodal revenue increased by 11% because of the strength of cross-border shipments. Chemical and Petroleum accounted for 27% of revenue followed by Industrial and Consumer at 22%. Automotive and Energy laggard behind at 9% of total revenue.
• UNP connects 23 states and has 32,340 route miles in its rail network that links Midwest and eastern gateways with Gulf Coast ports and the Pacific Coast. Union Pacific Corporation is the only railroad serving all six major Mexican gateways. During Q1 industrial revenues, which include automotive and Intermodal, increased by 3%. Bulk revenues, which include chemicals, metals, minerals, forest products and energy decreased 5%.
• NSC operates in 22 states and the District of Columbia and has approximately 19,500 route miles. Norfolk Southern Corporation also transports overseas through a variety of Gulf Coast and Atlantic ports. During Q1, chemical revenue increased 3%. Chemicals were the only positive revenue carload. This is primarily because NSC were committed to disposing locomotives no longer needed for railroad operations. The company deemed 300 locomotives disposable and actively marketed to sell approximately 400 locomotives. 

Full Time Employees:

• KSU: 7,040
• UNP: 33,871
• NSC: 24,587

Overall, the Transportation Index has been very weak; -17.02% year-to-date. It’s clear industries such as airlines will probably see some merger activity, or perhaps a high-profile bankruptcy. Transportation is the circulatory system of our economy - even more so in the Internet age, as packages find their way into our homes from truckers, and not the truck of our vehicles.

The Transportation Index (XTN) holds 42 stocks in six industries:

• 35% Truckers
• 24% Airlines
• 23% Air Freight
• 10% Rails
• 4% Marine
• 3% Air Transportation 

Portfolio Approach

Yesterday, we added a position in to Healthcare and reduced cash to 5% in our model portfolio.

Today's Session

The major indices are down this morning.