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Market Still Has Seller

Jim Giaquinto

Hi all, Dan Laboe here covering for Jim on his final day of vacation. He will be back in action and well-rested to provide you with his usual enthralling market commentary on Monday.

Today I'm going to take a look at the market action, some of the reasoning behind this pullback (and why it's a good thing) and examine some of our portfolios activity today.

We've Got Sellers

The bulls and the bears are battling it out at critical support levels. The Nasdaq 100 and the S&P 500 broke through their respective 50-day moving average after testing them several times throughout morning trading.

Towards the end of day, we saw a rotation out of the tech-driven Nasdaq 100. Investors pulled more profits from its biggest winners with Apple (AAPL) and Amazon (AMZN), leading the index down, illustrating daily losses of 1.5% and 2%, respectively. Investors are rotating these profits into some of the cyclical sectors that have underperformed in 2020, with banks, utilities, and industrials keeping the S&P 500 buoyant today.

This market pullback (which began on September 3rd) was catalyzed by the split surge from Apple (AAPL) and Tesla (TSLA). Both of these stocks saw huge capital gains into their respective stock splits on August 31st. Retail investors flooded into these shares on the implication that they are "cheaper," when in reality, AAPL & TSLA have never been more expensive on a valuation basis.

Both the Nasdaq 100 and the S&P 500 surged to the most overbought levels since January of 2018, on a relative strength index (aka RSI) basis, which can be seen in both charts above. The markets quickly corrected as institutional investors & traders stepped in and blew some of the retail investor driven froth off the top. The largest pullbacks naturally came from the most parabolic stocks.

With new sellers in the market, analysts speculate that a further correction could be on the horizon after 6 months of record gains driven by dtech. The impending November election is also bound to bring volatility with it.

Still, market optimism remains strong, with interest rates being pushed to virtually 0 for years to come. Jerome Powell and his dovish band of Governors vow to let inflation run for the economy's benefit. Analysts can now discount (denominator) the future earnings (numerator) of innovation-driven companies – who are expected to have massive payouts years in the future – at a much lower rate, making these enterprises more valuable today than ever before.

The massive valuation push in tech is justified, but to what extent? How much more do tech stocks have to run in 2020? With sellers beginning to show their colors in the market, it looks like investors may be ready for a profit rotation out of secular tech and into underperforming cyclical sectors, which are beginning to recover with the rapidly convalescing economy.

I am bullish about equities in the next decade, and 2020 has been an invigorating start to the roaring 20s. Still, I am apprehensive about what the rest of 2020 has instore for us. 

This correction is a good thing for savvy investors as it is providing ripening opportunities every percent the stock market falls. This slight stock retreat is preventing a much greater and more dangerous capitulation-driven selloff that could have occurred if the markets continued to drive upward unchecked.  

Do not panic if the equity markets are to plunge further, as this will be the time to capitalize and pick off your favorite stocks at a discount.

Remember what the legendary Warren Buffett said: "Be fearful when others are greedy and greedy when others are fearful."

Portfolio Highlights

We had some robust winners today despite the nearly sideways trading. CROX, VSTO, QDEL, and HWM all drove daily returns in excess of 5%.

Crocs (CROX) in the Counterstrike Portfolio was today's biggest winner, gaining 7.6% after management provided healthy Q3 guidance in anticipation of its presentation at the CL King & Associates' 18th Annual Best Ideas Conference on Wednesday.

Income Investor: Perhaps the most essential of all businesses during this pandemic is the grocery store, so it makes sense why supermarket giant Kroger (KR) just reported a stronger-than-expected second-quarter report. The company beat on both the top and bottom lines with digital sales soaring 127% from last year. It also offered a forecast for the second half of the year, which is rather rare these days. Maddy added the stock back on March 10th. Take a look at the editor's complete commentary for more specifics on KR's report.

Have a great weekend!

Dan Laboe

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