Investor Bullish Sentiment saw a significant jump in the latest week, according to the weekly survey from the American Association of Individuals Investors (AAII).

• Bullishness: 32.2% +8.3 percentage points
• Neutral: 27.6% -0.2 percentage points
• Bearish: 40.4% -8.1% percentage points

The move suggests an improved sophistication among individual investors sensing opportunities during the period of weakness. I think the number one and oldest investing axiom is “buy low, sell high.”

It should be noted, the long-term trend in 2020 has been decidedly to the downside, which belies this notion of wild irrational exuberance. I like that investors are warming up to the market on a pullback. I just wish they had been exposed to the market as much as the financial media suggested.

Sifting Out Weak Hands

Growing up, I used to love when I walked in the kitchen and saw my mom sifting flour, as I knew it was a key step in making a homemade cake. It seemed like an odd process back then, but it reinforced the notion something was being made with love.

Apparently, the process is necessary to break up lumps of flour before baking them into cakes or cookies. All I know is that it made me salivate because I knew a homemade cake (the good stuff) was on its way.

In many ways, I feel like the stock market has been in a sifting process, designed to identify and remove weaker investor hands. The latest shakeup also appears to be ushering a change in leadership. Right now, it’s mostly leaving a bad taste in the mouth of investors that had begun to get spoiled. But like the making of the perfect cake (chocolate), it’s a necessary step in the process.

Message of the Session

Yesterday, I have to say, however, I was very impressed with the early rebound effort in the session. I was not surprised there was a rebound attempt, which is only natural, considering the market opened down, partly as a show of defiance, not on the news, per se. I was surprised at how quickly and sharply major indices bounced back, but the effort was far too soon in the session.

Late in the day, buyers reemerged and bid up a smattering of names, while lifting the broad market off the worst levels. Materials rocked, led by fertilizer, chemical, and package companies. They’re not the sexy industries, but attractive risk-reward ratios.

S&P 500 Index		-0.84%
Communication Services XLC		-1.84%
Consumer Discretionary XLY		-1.41%
Consumer Staples XLP		-0.63%
Energy XLE	+0.15%
Financials XLF		-1.04%
Health Care XLV		-0.33%
Industrials XLI	+0.20%
Materials XLB	+0.74%
Real Estate XLRE		-2.21%
Technology XLK		-0.83%
Utilities XLU		-0.82%

Message from Losers

Just as there were an eclectic bunch of names among the biggest winners; yesterday, the biggest losers were also an odd mix:

• American Tower (AMT) took a serious drubbing, completely derailing the rally in Real Estate.
• Southwest (LUV) and Host Hotels (HST) were lower as there was some enthusiasm over the vaccine approval timeline, as reopening the economy faded.
• Facebook (FB), down on antitrust concerns, and the overall exodus from hot growth names.

Conclusion

Parts of the market have gone parabolic, and it was bound to pull back, while the larger swath of the market had been ignored for so long - even attractive traditional metrics were being ignored. Investors are still torn even as more revert to the notion of investing with the idea of making money over time rather than overnight.

Message from an Office Furniture Maker

Over the past weekend, when I went over the earnings calendar and saw Herman Miller (MLHR), I thought to myself, “this is going to be a disaster.” Well, the stock rallied 33% yesterday after posting remarkable earnings.  Our team looked into the data, and it turns out that the company rocked in places where economies are open: China, Denmark, Japan, and even in the Middle East. 

Management expressed “optimism,” that the same will happen soon in the United States. It turns out, not only did international business surge, but so did the margins. The U.S. gross margin was 38.1 from 36.6; internationally, 35.8 from 34.9.

Portfolio Approach

We lifted our cash position yesterday to 20% after taking profits on Southwest Airlines (LUV), which was a hefty gain in a short period, because I’m worried about near-time challenges. We also took profits on Generac (GNRC), as there might not be any near-term news, which that often yields headlines that boost the share price.

This morning, we are adding a new position to Consumer Discretionary and lowering cash to 3 in our Hotline Model Portfolio.

It Might Still Happen

The wildcard is Washington, D.C., and the next round of stimulus. I still see a deal in the neighborhood of $1.5 trillion, which my guest Senator Kevin Cramer (ND) agreed was a possibility. Later in the session, Larry Kudlow said a $1.5 trillion package is “in the range of plausibility.”

Today’s Session

Major equity futures have traded in a narrow range all morning but hinting at starting the last session of the week with an attempt to rally  News the White House will unplug TikTok after reviewing the potential deal with several American partners is not upsetting the market; although, it will dominate discussions in financial media because it allows a lot of (negative) guessing on what’s next.  Hint: Its not going to be war with China.

Pre-Open Trading	Low	High
S&P 500	3,341	3,370
NASDAQ	11,037	11,168
Dow Jones Industrial Average	27,762	27,995

• Buy the dip
• Sell the rip

The S&P 500 breaks out above 3,420 and must hold 3,331.

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