The Big Pink Show
Today, we’re going to cover a few things. First of all, let’s call today’s show the Big Pink Show. Cause I’m obviously overdoing it. If my wife was in front of me right now, she’d be saying I shouldn’t be wearing the pink bow tie with the same color shirt and she’d say go get a contrasting tie. I’m breaking all the rules. I’m a rebel. Gentlemen, this is what you can do when your wife’s not around. You can break the rules.
On with the show. We’re going to talk about a couple of my blogs and it ties into a theme that I’ve been talking about lately. And that is that there is a sector rotation happening where we’re starting to see the lower betas safer type of sectors pick up in steam.
And on March 24th, I wrote a blog called, “You don’t want to miss this next rotation”. I encourage you to read that blog because I think it’s one of the more important messages that have delivered recently, which is a look ahead at what the market’s going to likely be moving money into over the coming months.
The sectors that I’m seeing rotation doesn’t mean all these sectors are going to see all the money, but they’re certainly has been an outperformance in the past 30 days by staples, consumer staples stocks, utilities, industrials, which have actually been in a pretty good performance for a few months and communication stocks. So these are boring industries usually, on the other side of the barbell so to speak the under-performers of the past 30 days. Now I’m talking only a month, but it’s maybe giving a heads up to what might be happening.
I’m starting to see the technology sector and the discretionary sector lose some ground. So that tells me that there may be a rotation going on. I wrote a blog this week on the momentum ETFs, and there’s a big one out there by iShares MTUM, and I’m going to show you the chart in a minute. Basically, the momentum ETF has done very, very well. It outperformed the S&P by a huge margin over the past year, but that’s because it was almost invested solely in these names, the technology names, and the discretionary names, they were in the reopening economy.
Now, a lot of these names take a look at Tesla, take a look at the solar stocks, take a look at Peloton and Zoom, even though the company that I’m using to record this, they’ve all been kind of moving down lately, while again, boring companies like Kraft Heinz, which we own, and, and we own Coca-Cola a few of these staples are moving up.
So there’s a switch going on. And what’s going to happen is that if this continues, the momentum ETFs are going to be forced to move out of the old momentum names, being technology and reopening stocks, et cetera, and move into, believe it or not, the boring stocks, because if that’s where the momentum is, that’s where the money’s flowing. They have to go there. Now the big one that I’m going to show you the iShares Momentum, ETF controls, $14 billion, and that $14 billion is going to be readjusted come May. So there’s going to be a shift. If this trend continues where we start to see staples and whatnot move.
Take a look at what I am seeing, which is this is the Momentum ETF MTUN and you’ll notice that it’s underperformed like the S&P has made new highs, but this thing is actually fallen quite a bit, and it’s not recovering it’s basing.
So what that means, it’s still stuck in these technology and whatnot stocks. It’s still stuck in Amazon or whatever that haven’t been moving, but it’s going to rotate out. I can guarantee you, they rotate out of them. If this trend of shifting into the safer sectors continues. And there’s a good chance it will, so I wanted to bring it up to your attention. It’s one more piece of evidence from the blog I wrote on the 24th, that there could be even more of a shift into the safer names. If this Momentum ETF is forced to shift into them.
The next thing I want to talk about is the potential for a market top. As soon as I say, ‘market top’, everybody thinks peak is predicting a crash. Markets go through all kinds of cycles, including 25% corrections or 20% corrections.
It doesn’t have to be 1999, 2000, 2001 tech crash, or an ’08 subprime bubble crash, it could be a 25% correction or a 20% correction. So I think we’re doing one of those, and this is presenting some evidence doesn’t matter what, by the way, the extent of the market movement is, these signs are that I’m going to show you these cycles return time after time.
What we are seeing here is a typical, you know, fear and greed cycle, which everybody’s seen this kind of graph before. Now, we’re just pointing out. This is a notation I wanted to make that we may be here and we aren’t necessarily here, but we, where we maybe, are seeing the topping process. And that would suggest that maybe we get one more blast in into the next month or two before the market takes some sort of a correction.
Now, this looks very doomsday. It might only be a 20%, correction like I said, but the point is that some of the signs then, and I’m drawing this from SentimenTrader, they look at whatever markets are topping out and about, correct. You know, more than say 10%, like a fairly substantial correction. There are certain signs. It’s usually high optimism, easy credit rush of initial offerings and secondary offerings risky stocks and stretch valuations. So I think that if you stop and look at what’s happening in the market right now, you’ll probably be able to check these boxes for every one of the conditions. Definitely, the market’s been optimistic because the market’s been strong. The credit comes on, like interest rates are darn close to zero everybody’s in debt up to here. In fact, Canadians are the most in debt consumer in the entire developed world, which is very scary real estate being out of control.
A rush of initial secondary offerings are going to present some proof to this in a minute, with our bonus chart. And of course the outperformance of lower quality or higher risk stocks take a look at a lot of these newer companies that are involved with the solar industry and the electric vehicles like Tesla, whatnot. These, these were, I mean, they’re good companies, but they’re pretty early technology. I shouldn’t bring up Tesla that would go into the stretched valuation category, which I think it’s peaked was something like seven or 800 times at its peak come on. But whatever the case, we were seeing a lot of, sort of semi startup, you know, kind of new technology stuff like Zoom, like, like Peloton. I mean, they’re good companies, but still riskier stocks certainly than some of the consumer staples you might say, right?
These have outperformed, so this checkbox could easily be checked off. And I’m going to bring you over to the bonus chart now, which you’ll notice that this is the dollar value of the IPO’s initial public offerings. There has spiked, and it doesn’t always coincide these spikes with Mica market highs, but, but often it does. And you’ll notice that the dollars into going into IPO’s is higher than it has been. Well, really since the eighties it’s in fact, it’s not been as high even since the eighties. So this can be a sign of when we go back to that checklist, that SentimenTrader gave us. And this chart is by SentimenTrader. This is one of those conditions that often happens near market highs. So I wanted to bring this chart here to your attention, because it kind of fits in with the overall potential for a fear greed cycle to be near that top.
It doesn’t mean that today go out and sell all your stocks, but it does mean you start watching some of the other indicators.
And on that note, next week, I’m going to be presenting my bear-o-meter, which has a number of notes coming from the sentiment indicators that I follow. So that’s a more quantitative way of looking at what the market is doing. The other thing I want to bring up is I’m in the midst of finishing off my manuscript for the new book on contrarian investing. And that’s really what that cycle that we just looked at is all about, is trying to sell what others are greedily buying and buy when others are despondently selling. So I’m going to be publishing that book in the next, I hope two months or so. So hopefully by June or July. And I’m looking forward to talking to you more about that in the meantime, happy trading, and be sure to check out the blogs at valuetrend.ca. And thank you for watching this video. Have a great day.