Market Watch

The Correction was Rotational, Primary Uptrend Intact

“If they are telling you to sit still and stay passive, it might be because it’s easier for them, not because it’s better for you.” – Willie Delwiche

 

Bottom Line: The Nasdaq 100 index dropped 11% from Feb. 16 to March 8th as money decided to quickly move out of technology stocks into cyclical and commodity-type stocks.

Market health numbers (Our Primary Trend Indicator) show the broadening out of the economy, and the rotation of the market to a recovery-type of economy. In our view, evidence continues to build that we are seeing a real commodity cycle that will last. This “rotation” is still being covered as a “for now” story. Next up I expect to hear the “proves resilient” & “gains speed” perspectives.

We remain a bit concerned that our Buying Power Indicator, which measures strength, or lack of strength, in money flowing into stocks, continues to suggest that institutional money is not joining the party yet. Because of this, we continue to keep our stops tight on most positions. Long-term however, the bulk of the evidence remains bullish and we are in a bull market.

 

In the Markets

Headlines and CNBC blamed recent stock market volatility on the sudden rise in interest rates as we discussed here. Whether it was the real reason for the recent rotation or not, it shouldn’t really matter, as the stock market can do very well when interest rates rise. Rising rates is often a sign of an expanding economy. In fact, the biggest bull runs of the past 15 years all occurred amid rising interest rates.

In 2003, as a new bull market kicked off, the US 10-year yield rose from 3.07% to 4.67% in just three months. They rose a bit further during the next few months, but that didn’t stop the stock market from going bananas. Incidentally, 2003 was the start of a major move in commodities, like we are seeing now. This ushered in significant outperformance of both the Canadian stock market and emerging Markets relative to the S&P500, also something we are starting to see now.

In 2009, rates bottomed at 2.04% before doubling by the middle of 2009. Of course, stocks had again just begun a major move higher. And in 2013, when the S&P500 rose 30%, we saw the 10- year US yield move from 1.75% to 3.04%.

So, if someone tells you to fear rising interest rates, refer them to this note.

 

 

Bubble in Passive Investing

Pundits like to talk about “bubbles”, and there certainly are some bubble’s out there. I think the biggest one is in passive investing, which is very popular in recent years. I believe this is having an impact on short term market gyrations and will continue to in the future. In fact, passive investing crates problems we must learn to adapt to.

An S&P 500 index fund or something tracking the Nasdaq, for example, will rebalance at will, often making decisions to buy and sell billions of dollars in stocks with zero bearing whatsoever on the underlying business proposition or fundamentals.

This growing reality has two impacts on us. First, we will have to adjust our trend system to allow for more shorter-term gyrations. Second, as demonstrated below, is the opportunity to take advantage of such volatility.

 

In Our Portfolios

The second impact of wider short-term swings is actually a gift horse in disguise for any savvy investor who understands the opportunity to buy a great company that is being discounted, yet which still has a phenomenal business and growth ahead.

This is why we added Palantir Technologies (PLTR, Nasdaq) and Perion Network Ltd. (PERI, Nasdaq) this week; two companies that look to have incredible growth in front of them.

If Palantir sounds familiar to you, it’s because we owned it once before. Mostly we try to own stocks that are trending smoothly, with dependable profits on reasonable valuations. However, we also try to position ourselves into the Microsoft- and Amazon-type companies of the future. The market is still trying to figure out some of these companies, like PLTR, and that can result in volatility as the market positions back and forth.

PLTR is 17 years old, but only went public last year. When a company initially lists its stock on a public exchange, it’s called an initial public offering, or IPO. When a company does this, Insiders are forced to hold their shares for a certain window of time.

After we originally bought PLTR in late 2020, it got a bit ahead of itself running to $40, and we knew that in the next week the lockup for the insiders was coming to an end. Knowing that some selling was to be expected (insiders who come into new wealth from the stock going public), while the stock was “extended”, we sold our last holding in PLTR at $39.88 on Jan. 27th with a 50% gain in our position.

We’ll see where she goes but PLTR is truly dominant in the big data space. The company basically has no competition except the organizations themselves, which makes it very, very different from most “software as a service” companies. Factor in sticky government contracts and a growing need to harness big data and we could see Palantir grow earnings at 50% for some years and 65% in the gov’t sector. I think Palantir has every ingredient to be a big winner for us.

The recent, expected pullback presents us with an opportunity. We added PLTR at $26.50 this week. I don’t “do price targets” but my expectation is for solid upside on PLTR over the next year and more. Our stop is currently at last week’s lows at $22.50. That’s a little wider than usual, but warranted for a stock like this. If we can build some cushion above the 65 Day Moving Average (red line) we’ll probably add to the name and then use the 65 DMA for our stop from that point.

 

 

Conclusion

The best investors I have known are always more worried about the potential downside, and maybe I talk about that too much in these updates.

The fact is, I think it’s possible that investors can create more wealth in the next ten years than in the last fifty years combined as we transition from an economy based on access to limited resources to one enhanced by mastering informational technology.

Think about it, within five years, 75% of the population is expected to be touching the internet every 18 seconds and the big data sector is expected to add $16 trillion to the US economy by 2030.

Innosight Consulting expects that, at current rates, 50% of the companies in the S&P500 will be replaced by 2027 due to massive innovation in technology. I think the world will be very different in ten years and that some of the next big winners are already out there.

We remain completely open to any eventuality that the markets bring and will work endlessly to make sure your portfolios benefit from change, rather than fall victim to it.

Our strategies, tactics and tools will help us to successfully navigate whatever happens as we focus on monitoring supply and demand signals that the market provides us.

Have a great weekend and if you have any questions about this update, or anything else please do not hesitate to reach out.

 

Peter Schenk, CMT, CIM | Portfolio Manager

 

 

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