The Horsemen of Technology, which led the way during the ‘go-go boom times’ of the late 1990s, have gotten back into the game through strategic acquisitions and moves into things, such as the Cloud, Internet of Things (IoT), Artificial Intelligence (AI), and Big Data.

Last week’s exchange-traded fund (ETF) trends speak to investors seeking value and calm in the middle of this selling storm. Redemptions out of corporate junk bonds as well as investment-grade corporate bonds might start to shift the investing focus on companies carrying higher debt in general.

Interestingly, there were net inflows into U.S. equity ETFs, perhaps underscoring the oversold nature of a market, where investors are seeking value. The question is whether these names are a weigh station until the hot names stop going up in flames and simply start going up. 

ETF Trends Redemptions
Asset Class	Symbol	Net Flows
Corporate debt (High yield)	HYG	-1.8 billion
S&P 500	SPY	-$832 million
Industrial Durables	FXR	-$739 million
NASDAQ 100	QQQ	-$646 million
Financials	XLF	-$631 million
Corporate debt (investment grade)	LQD	-$605 million

ETF Trends Creations
Asset Class	Symbol	Net Flows
S&P 500	IVV	+$1.3 billion
Health Care	FXH	+$738 million
Low Volatility	SPLV	+$699 million
Utilities	XLU	+$536 million
Russell 2000	IWM	+$477 million
World Stock	VT	+$462 million

The Comeuppance of the Hare

Just like that, the market is essentially flat for the year as those fast-moving names that lapped the crowd for so long continue to retreat.

Investors love those High-beta stocks on the upside, but panic on the downside.

Until recently, the notion these names could back up enough that other decidedly less volatile (read: boring) names could be up as much seemed preposterous.

Kind-of-like the fable of The Tortoise and the Hare.

So, major equity indices find themselves back at the starting gate with less than two months to the end of the year:

• Nasdaq Composite: +1.8%
• Dow Jones Industrial Average: +1.2%
• S&P 500: +0.6%
• Russell 2000: -2.5%

A deeper look underscores what I have been pointing out for a couple of months - the number of losers. Now that it’s larger than winners, it illustrates how difficult it’s been to outperform them this year.

S&P 500

• 268 Losers
• 235 Winners
• 75 Companies -10% plus
• 84 companies -20% plus

Portfolio Balance Changes

20 equally-weighted position

After the close on Monday, there were several earnings reports, lots of big beats, and strong initial reactions to the following:

• Agilent (A)
• Intuit (INTU)
• Urban Outfitters (URBN)
• Pure Storage (PSTG)

We are looking to put cash to work. While we won’t force the issue, there will be strong knee-jerk bounces for many stocks that are traceable; for others, that will be the buy signal.  If you are not currently a Hotline subscriber, click here to get started today. 

Communication Services	Consumer Discretionary	Consumer Staples	Energy	Financials	Health Care
2	2	1	1	1	1
Industrials	Materials	Real Estate	Technology	Utilities	Cash
2	4	0	2	0	4

Today’s Session

The season of panic continues with some interesting lessons on business and investor behavior.

Target (TGT)

The stock is under pressure mostly because the company is investing in its business.  When you hear pundits complain about businesses putting more money into buying back stock instead of investing in their business, it points to the reaction in shares of Target.

Use of Cash during quarter:

-Capital expenditure $1.0 billion

-Dividends $337 million

-Buybacks $526 million

The company saw digital surge by 49%, which underscores why management had to make “significant” investments:

• Delivery
• Pick Up
• Training
• Wages

The results are a decline in gross margin and a bigger decline in operating margin, 4.6% from 5.0%.

Overall traffic grew 5.3%, comp store sales increased 5.1% (street was looking for 5.2%), and the company took market share in all five core merchandise categories.

I think the stock is a hold and would wait for management’s post-holiday update on January 10, 2019.

Retailers in Retreat

Meanwhile, all retailers are under pressure even those with decidedly strong results and guidance.

Best Buy beat on revenue and posted earnings of $0.93 per share, beating, as comp store sales popped 4.3% against consensus of 3.5%

Kohl’s beat on the top and bottom line, and the stock immediately moved sharply lower.

Stock to Watch

The stock to watch is Boeing.  Since the horrific Lion Air crash on October 29, that took the lives of all 189 people on board, there have been questions about the Boeing 737 max and the revelation of a software system nobody was aware existed.

The Maneuvering Characteristic Augmentation System MCAS was installed to help pilots, but no pilot in the world even knew about it.  The system monitors nose and wings levels and could automatically push the nose down on incorrect information while pilots are in manual flight.

This morning, Boeing canceled a conference call that was supposed to offer some answers.

In the United States, Southwest (23) and American (15) fly 737 Max and were planning to order more. 

Meanwhile, overnight the company signed a new order with Jeju Airlines of South Korea for 40 737 Max 8 and an option for an additional 10 airplanes in a deal potentially worth $5.9 billion. 

An already weak market began to dive even lower.  Yesterday, Boeing was responsible for 293 of the 395 Dow point loss.

Momentum Names Continue Lower

All the high flyers are indicating to be much lower out the gate.  At this point, selling is on autopilot, and this is about testing the resolve of shareholders.  Key support points are established as old points seem irrelevant.   

 

Comments

I believe that the market structure is changing... With the new Trump administration allowing businesses more room to maneuver, a lot of innovation is being allowed to come to market now more than ever... So the usual top liners are being replaced by new ways of doing older businesses... Andrew B Newallo on 11/20/2018 9:28:46 AM

As a retired controls engineering manager, I cannot imagine the stress the system developers at Boeing are under. wk on 11/20/2018 9:36:44 AM

Companies barely or just missing earnings is a perfect reason the last rate increase from the Fed was not needed. One has to wonder the intent of the Fed, I’ll go with it was politically movated as a way to stop Trump. Powell knee what he was doing; he sneers to be replaced Tom on 11/20/2018 10:47:46 AM

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