Time to rotate into value stocks?

May 27, 202017 Comments

I’ve noted in past blogs that market breadth remains poor (concentration of buying in just a few stocks). This market has risen on the back of very few stocks – largely benefiting from the “stay at home” trend. Names in the take out food industry (Chipotle, McDonalds), companies involved with remote access or internet interaction (Google, Adobe, Zoom, Netflix etc) and of course, online shopping (Shopify, Costco, Amazon). So who is buying these names? I’ll give you three guesses and the first two don’t count!

That’s right… retail investors (aka dumb money) are picking these stocks up at an accelerated rate. Below: a chart from Goldman Sachs illustrating small option traders volume as a percentage of total volume on these stocks.

Given the history of “dumb money”, when broad markets or concentrated sectors are being bought enthusiastically by this group, its usually a sign of a top. In this case, its less so a sector play like it was during the 1999 tech bubble or the 2007 energy/ debt bubble. This thematic play is focused on the current social distancing policies. True, within every theme, there is some truth to it. Who can deny that the internet and technology growth theme of the late 1990’s wasn’t accurate? The NASDAQ (where these names tend to be concentrated) rose to all time highs in that move.

Also true was the increasing worldwide usage of energy predicted when investors bid oil itself, and energy producers to record highs by the spring of 2008.

So I won’t deny that the landscape has changed for retail shopping towards online. I won’t ignore the likelihood that more companies will promote working at home by employees. And this benefits the stocks that are involved in that evolution. However, you will note that while the themes of increased technology usage (late 1990’s) and increased energy consumption (2006-2008) turned out to be true, the stock market overbid and overvalued the stocks that might benefit from these developments.

Here’s a chart from sentimentrader.com showing their “crude oil optix” which is a collection of sentiment indicators on that commodity. Note the enthusiasm (consistant level over the “overbought” top line) for oil between 2005- 2007. This lead to its peak and eventual crash in 2008.

Here is the NASDAQ optix chart from sentimentrader.com. Note again the concentration of positive sentiment (upper line) between 1999 – 2000 leading into that crash.

Now lets take a look at where the NASDAQ stands right now from a sentiment point of view. Note that, once again, we have a very high level of positive sentiment. Its hard to pinpoint the NASDAQ as the main index for the stay-at-home economy, but its a start.  As indicated by the volume chart at the top of this blog, we can surmise that much of that bullishness resides in the minds of “dumb money” investors. And that’s never a good thing over the long run.


When dumb money is buying the at-home-economy enthusiastically, and broad sentiment becomes overdone for the index containing many of these names, we should take notice. At the very least, we might expect some neartermed rotation out of some of these stocks as the stay-at-home story becomes priced in.

For our part, we are continuing to search for value names with decent balance sheets that may catch the next rotation. I noted three such names here. There are plenty of candidates that fit the “basing” technical profile alongside good balance sheets. Keep an eye open for these opportunities, and consider taking profits on some of the names that might indicate a bit of irrational enthusiasm.

It would be great to hear from some of you on ideas you have been buying or researching. As Red Green used to say…”We’re all in this together”

Happy trading!



  • Hi Keith,

    I am not buying anything at the moment and actually sold into this rally as it was moving up. Now I am exercising patience and waiting for the a meaningful pullback to deploy cash. Is it possible that the big boys are suckering everyone and their dog into this rally before pulling the rug out from under them? All I hear about is how people who have never bought stocks before are now buying for the first time ever. Seems like a perfect scenario for people to get burned and sell lower while the “smart money” buys back in. Thoughts would be appreciated.

    • Parm, there is potential of new investors buying stocks – something I read (cant recall the source) was suggesting that the COVID cq’s going out to so many people across NA are in many cases not needed – given the only real qualification was to have a SIN# and no job. Lots of these people like prior part-time workers and people already out of work (believe it or not, criminals in jail qualify, and have been getting them!) are investing the money in stocks, according to that source–sorry I cant recall where it was that I saw it. I can qualify the criminals getting the CQ’s–having a family member who works in a max security prison – he was the first to tell me about that occurrence. They don’t have to worry about repaying the tax. They are already in jail!

  • Keith:Keep up your timely comments concerning the S&P 500-200 day MA and rotational trends.

    • Will do Don
      One of my TA research analyst contacts who works for a major brokerage firm noted to me recently that had he known that all you had to do was hold stocks so long as the Fed keeps paying to support the market, his job would have been easier recently. The market certainly isn’t paying much attention to anything else.

  • I have sold US stocks into this rally, ive done well and have quite abit of cash on the side now (60%). I am no professional but definitely worried at this point. Im out of all My US holdings for now and have not gotten back into any Canadian holdings since the correction started.

    It is funny Keith,,, i read your book years ago and have followed your blog and I am doing exactly the opposite of what your strategy taught me!! LOL! Being above 200sma and staying mechanical should prove to work but i just dont get this market and i feel stressed most days and just need a break!

    I feel like the Canadian market reflects a truer picture of what is going on currently and that the US Market is fake and rigged feeling… like i said, i am no pro and these are simply feelings! LOL

    I see higher markets until the election is the US is over possibly, seems like this is the end game… Who knows?

    • Matt–thank you for your comments and kind words. If it makes you feel any better (re feeling stressed)–I talk to some pretty significant Portfolio Managers and research analysts regularly. Most of us (myself included) are white-knuckling it right now. Its a world, world mad out there!

  • Hi Keith,

    Initially yes, the rally was lead by tech stocks, however, the rally has been broadening out as the major US indices have been in consolidation. There is rotation going on. Cyclicals are being bought. Also, US small caps and Mid caps are now above the bear market level. The rally in US markets is not as concentrated as it once was.



    • Actually, this is true Dale–its happening. I noted yesterday some definitive rotation OUT of the stocks noted on the volume chart at the top of the blog–and INTO beaten areas like airlines and banks. Will be interesting if this continues to happen, which would be healthy.

  • who is buying in this kind of market is out of lunch….CASH is king.
    Keith, will you still buying S&P 500 now or next week above 3000.

    • Hi Sam
      I am going to deploy one third of my cash, retaining about 25% cash after. I feel like you do, that this market is just goofy. But, rules are rules (for my way of ding things)–so Craig and I have decided to enter after the weekend with ONLY low beta names…low risk. If things keep going, I will do another third and then the final third over the coming month as I see fit. One step at a time.

  • Thank you Kieth, so you will not buy the index 500. I may buy 500 hedge next week for only trading. the Fed will cheer up the market with lots of cash.what do you think. I really trust you.

    • Sam–I dont know much more than anyone else so my opinion is just opinion, not advice. But for what its worth–I am not the only PM who pays attention to the 200 day SMA break. Its significant, and it will be bought by many market players. How long or how far it goes is your guess or mine. But its hard to fight the Fed, and its hard to fight the trigger that certain things like that 200 day average can be. Because I am so dismayed by the rapidity of this rally and the valuations that come from it, I have chosen to go with low beta solid balance sheet names to avoid being too hurt if all goes to hell. Further, I will continue to hold cash and be careful about how I leg in, if I do so.

  • Look this stock market is like a train: it crashed in march going to fast on a broken railroad. The Fed put it back on the rail, stuffed the engine with coal and now that it’s getting speed we are uncertain of getting back on it because the railroad is still broken. Will I miss a good ride?

    • As Howard Marks says: You can’t predict. You can prepare.

  • I have been waiting for the S&P 500 to hit it’s 200 day SMA, about 3000, to start buying in like you. The trouble is, all the solid stocks have got almost back to their pre COVID highs. Stocks like CP, GOOGL, MSFT, JNJ, HD, AAPL, IHI, etc. There are only dogs left to buy, which are obviously most affected by the COVID. The banks, insurance companies and REITS are good value but if the COVID stays around they could be punished more and they are high Beta.
    The Utilities and Telcos are low Beta. What other sectors are low Beta that I am missing as would still want to diversify.
    In hindsight instead of focusing on just the S&P, should we have focused on individual stocks that were making new highs and crossing above their individual 200 day SMA’s?

    • Paul-great question. Here is how we view things:
      First, we are still giving it until next week before we start to buy anything at all. Really need to see that this break of the 200 day is not a head fake!
      But, lets assume the market pulls back a bit over the next few days but the SPX doesn’t crack 3000. This would confirm one initial leg into the market for us (not all of our cash!)

      Your point about quality stocks being high is valid. I do understand what you mean – for eg we like AMZN as a company. Just because a given stock is that of a “quality” company doesn’t mean its a good value. Case in point– Forward 12 month price/earnings ratio (consensus) is at 127 for AMZN according to Thomson Reuters. Say, what?!?!?!
      AMZN is a great company but its stupidly expensive. I own a Porsche 911 turbo – epic awesome car–just love it. But I bought it used at half its listing price. New ones are stupidly expensive, which doesn’t detract from their being a great car- but IMO the new ones are too expensive. Doesn’t mean somebody wont buy a new one today. I just won’t. Same with stocks. AMZN is a top notch company that is stupidly expensive. People still buy the stock. But I won’t.
      On the other hand–I noted a couple of value stocks on a prior blog that I will suggest are bargains. Loblaws was one–we feel it is cheap, and we own it -personally, professionally. They have a good balance sheet, and their business model is not going obsolete in our opinion. I am not endorsing that stock as one you should buy (see the blog for the risks- nothing is perfect), but its an example of a beaten stock that is possibly protective if the high flyers take a dive, making the index fall. https://www.valuetrend.ca/3-top-picks-with-keith-richards/

      My suggestion:
      Find a way of identifying stable businesses with great balance sheets that are not trading at ridiculous multiples and in parabolic price rallies. Then look at the charts and determine what the upside target vs. downside support (where you would stop out) might be. Look for about a 2:1 up/down potential ratio. If its favorable, consider investing a portion of your cash, and then leg in a bit at a time assuming the rally continues.


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