Utilities … the new Software? It would seem so, in terms of performance. Utilities are performing the way you might expect Software to perform and Software is worse than the Utilities on a bad day. Somehow this doesn’t sit too well with us—we don’t like to see the leaders not leading. Throw in the poor performance of the FANG stocks and you can argue leadership, new and old, is underperforming. That said, the Semis hold together surprisingly well, surprising since they are in the crosshairs of the trade war. It’s interesting, too, that all this should be happening while the market averages hold together. Leadership shifts more often happen in market corrections. While the leadership flip-flop is puzzling and more than a little disconcerting, with the Advance/Decline Index a few issues off of a new high you would be going against a lot of history not to stay positive here. Meanwhile, the Utilities are acting almost too well. Sixty percent of the stocks made a new high Tuesday, a level that usually marks a temporary peak.
A notable exception in the weak area of Software has been Microsoft (140) and it has had some good news—a buyback and dividend hike—to help it along. Perhaps we’re asking too much even from Microsoft, given the weak area, but its inability to follow-through to the seeming breakout is a little disappointing. We certainly would not like to see it drop below 132-133, the lower end of the recent range. Despite the fact that MSFT is one of the 10 largest positions in the iShares Expanded Tech-Software ETF (IGV-215), that index is teetering at the lower end of its range. Meanwhile, you might say the VanEck Semiconductor ETF (SMH-121) is teetering at the upper end of its recent range, seemingly about to break above the peaks of April and July. A stock around forever that’s representative here is Taiwan Semiconductor (46). The pattern there is basically that of the ETF, but better. Not in the ETF, and perhaps the best performer of the group is KLA Corp. (162).
The shift in leadership or, perhaps more correctly, the shift in what is going up, often is described as one from growth to value. We see it in more simple terms—a shift from the up stocks to the down stocks, from the overbought to the oversold. With all due respect to Pier 1 (11), we doubt this is the new leadership, although the stock has more than tripled. It seems more of a “January effect” in September. When stocks become sold out, it doesn’t take a whole lot of buying to see a big rally. Similarly, after more than a triple since the start of the year, you can imagine buyers in Shopify (313) might be a little exhausted. And it didn’t help that Cramer may have done for Shopify what he did for Nvidia (177) a while back—get the stock over-hyped. That said, stocks don’t just turn on a dime, they don’t go straight up and then straight down. There were plenty of dips in SHOP that gave you a chance to get in, but it was hard to do so when the stock had had such a big run. As often happens, we suspect investors finally learned to seize the day, it was just the wrong day.
Impeachment sounds serious. It depends—like most things when it comes to the market—on the market. It gets back to one of our favorite market sayings, “the news doesn’t make the market, the market makes the news.” It was a bad market when Nixon was impeached, and the market continued lower. Given what we see as a positive backdrop now, this seems more the Clinton impeachment market, when prices continued higher. If the market wanted to go down, it easily might have followed-through to Tuesday’s bad day, and Tuesday was a bad day. Meanwhile, Wednesday’s could have been a weak rebound, but with 2200 NYSE stocks up, it was good enough. That said, things change and we can’t emphasize enough the importance of keeping an eye on the A/D numbers. It was around this time last year the Dow rallied to a new high three consecutive days, while the A/Ds were negative all three days. There were other problems too, but the market then sank 19%.
When you hear we’re close to a trade deal, does that mean we’re closer than the last time we were close, and the time before that when we were close? If the market wants to go up on that news, it seems the market wants to go up. There’s still plenty of news that could shake the market—the impeachment threat may yet do so. And while there was no follow-through to Tuesday’s weakness, Thursday saw no follow-through to Wednesday’s rally—how do you say, trading range? The biggest issue remains the leadership flip-flop, which isn’t all that easily defined. Procter & Gamble (124) certainly qualifies as an “up stock,” and yet it made another new high this week. The Consumer Staples ETF (XLP-61) is only a dollar off its high. The aforementioned Utilities have had a good year and have continued higher, and the same is true of the Private Equity firms like Blackstone (53). Meanwhile, is the IPO market a sign of restrained enthusiasm, or is it another sign of exhausted buyers? The advance/decline numbers suggest the former.
Frank D. Gretz