by Brooke Thackray, Research Analyst, Horizons ETFs
Market Update
JETS - Signs of Crazy Speculation
In the 1990’s and 2000’s, Warren Buffett said that he would never buy an airline, stating that they are terrible businesses, as they were very capital intensive and continually go bankrupt. In 2016 and 2017, he changed his mind and bought American Airlines, United Continental Holdings, Delta Air Lines and Southwest Airlines.
The Covid-19 pandemic caused the price of airline stocks to drop sharply and the airlines are hanging on by a thread in these tough economic times. Some may not survive. Warren Buffett should have followed his own advice and stayed away from airlines. He has recently exited his positions in the airlines and vows never to buy them again. I strongly doubt that he will ever buy airlines again.
A lot of retail investors disagree with Buffett and have been betting big on the airlines. The interest in the airlines clearly shows up in the U.S. Global Jets ETF (JETS). In the past it has been a minor ETF with a small amount of assets under administration (AUM).
In early March, JETS had only $33 million of assets under administration (Bloomberg, ‘Bored’ Millennial Day Traders Boost Airline ETF’s Assets 2,930%, June 3). The the ETF only had $33 million. Most investment companies will close ETFs with such a small amount of money in a fund if it persisted over time. The situation has clearly changed. In early June, the AUM of JETS had increased by 2,930%.
There are currently two bets with the airlines. One, the economy is on an economic rebound. Two, that the government will back the airlines if they run into trouble.
So who is buying the airlines?
There are definitely a lot of retail investors buying JETS, including the new kids on the block - the millennials. According to the Bloomberg article, Robinhood, the retail trading platform, popular with millennials has shown a huge spike in investors holding JETS. In early March, only 500 “robinhoodies” held JETS. At the beginning of June, the number had spiked to 30,000.
Yup, the rookies that have never experienced a major protracted downturn in the market are buying JETS. To teh millennials, a dip in the stock market only means one thing- buy. It has worked for their entire investment career. They have been trained to believe that nothing can go wrong. If the stock market does decline, they believe that the Federal Reserve will step in and support the markets. Actually, I cannot blame them in this respect as central bankers have created a huge moral hazard in constantly taking action to support the stock market.
So why are millennials all of a sudden interested in investing in the stock market? First, they believe that the correction that took place in March was a rare opportunity and it is their turn to make money in the markets.
Second, they are bored sitting at home during the Covid- 19 pandemic. Not only do they have a bunch of free time, but also there is very few gambling outlets for them. Now that sports betting is closed, why not just gamble in the stock market? What can it hurt if the stock market tends to go up over the long-term?
Third, a lot of millennials are no longer spending money on restaurants and travel and are have more cash on hand. In addition, many have received “free money” from the government support programs. They did not work for the money so why not gamble with it.
Fourth, investing in stocks is free. Yup, free. Well not really, but the millennials believe it is free because there are no commissions to buy stocks with robinhood.com.
Of course, it is not just millennials that are driving the frothy markets, others are speculating as well. JETS has become a sentiment indicator for the stock market. As the “Robinhoodies” and others gamble in the airline sector, watch JETS for a sustained downturn relative to the S&P 500.
If JETS starts to underperform the S&P 500 for more than a few days, it will probably indicate that the speculative nature of the stock market is dying out and the stock market is at a greater risk of a correction. The Robin hood fable (the real one with Robin Hood and his Merry Men) is a wonderful story that has a happy ending. I am not sure that the current situation will lead to a happy ending.
Technology sector as a market barometer follow up
In past writings and videos, I have been tracking the performance of the technology sector versus the S&P 500 as a market gauge. I postulated that since the technology sector was the leader of the market for the last few years, investors would have a strong indication that the bull market was in jeopardy if the technology sector started to consistently underperform the S&P 500. In previous S&P 500 corrections, the technology sector lead the market higher off the bottom. Essentially, investors rushed into the technology sector when they perceived it was on sale. Once again, this phenomenon occurred from the March 23 low; however, investors have recently re-directed their focus from the technology sector to the cyclical sectors of the economy.
Recently, the industrials sector has been outperforming the S&P 500 as investors have been betting on a steeper economic recovery than previously expected.
As investors have been shifting into the cyclical sectors of the economy, the technology sector has been underperforming.
Currently, the technology sector is poised to break its up- ward trend line relative to the S&P 500. Does this mean the stock market is about to stumble? Not necessarily. First, the weakest month of the year for the technology sector relative to the S&P 500 on average over the longterm has been the month of June. Second, the cyclical sectors of the economy have “picked up the ball,” and are leading the market higher at this time. Yes, an under- performing technology sector is a sign of weakness, but an underperforming cyclical sector, such as the industrial sector will probably be confirmation that investor’s fear of missing out (FOMO) is abating and that stock market is poised to correct.
For some speculators in the stock market, the technology sector has become boring. They are much more interested in buying companies that are in the throes of bankruptcy or are preparing for bankruptcy or have never made a profit.
When investors shift to risk-offmode, the technology sector will likely outperform the S&P 500. Until the stock market moves decidedly downwards, generally investors will probably want to stay invested and shift to different sectors of the stock market based upon risk assessment. It is possible that we could see investors move back and forth between technology sector and the cyclical sectors. When investors are in a risk-on mode, the cyclical sectors will probably outperform the S&P 500. In a risk-offmode, investors will probably favor the technology sector.
Given what has been taking place in the cyclical sectors of the stock market, it is best to watch for both the industrial and technology sector’s performance relative to the S&P 500. When both sectors show signs of underperformance relative to the S&P 500, it is likely that the stock market has topped and is in a decline phase.
Seasonal investing is a discipline of preparation
No one knows the future. No one knows when the stock market is going to top or when it is going to bottom. No one.
The best that anyone can do is assign probabilities, based upon certain parameters. This is true for all types of investors, including fundamental, technical and seasonal investors.
Preparing for the future means positioning a portfolio on what is likely to occur.
When I was in my youth, I played hockey against Wayne Gretzsky in a quite a few tournaments. Wayne is a great guy, but he was not a fast skater, didn’t have the hardest shot, wasn’t the best stick handler....but he was the best player. He was better than anyone on the ice, in being in the right place at the right time. He anticipated what was going to happen, not what was happening. Sometimes, the play would be bottled up in the corner with multiple players fighting for control. Wayne was not one to enter into foray like everyone else. He had a knack for positioning himself where the play was going to develop in the future.
Investing is not dissimilar to sports. It is best to put yourself in a position on what is most likely to occur, and not get caught up in what is happening at the current time.
Currently, investors have shifted their preference to investing in the cyclical sectors of the economy as they have perceived a win-win scenario. If the economy is expanding, then the cyclical sectors will perform well. If the economy stumbles, then the Federal Reserve will dump money into the markets supporting cyclical stocks.
As investors are betting on the Federal Reserve coming to the rescue if needed, a lot of investors have become momentum traders. Their modus operandi is to ride the wave on whatever hot stock is going up, even if it has filed for bankruptcy.
There is an underlying rationale in the current momentum trade. Investors believe that they can get out in time if the stock or the stock market starts to decline. Sorry, but this rarely happens. A small decline typically appears as a buying opportunity, which then rolls into a large decline and it is too late to get out.
It has often been said that the stock market on the way up is like riding an escalator and on the way down it is like riding an elevator. Declines can be very steep.
In the six-month weaker seasonal period for stocks, from May 6 to October 27, stocks do not just tick down slightly on a daily basis. That would be too easy. Sometimes the stock market does peak very close to May 5 (in 2019 the S&P 500 had interim peak in early May), but the stock market often meanders higher in its weaker period before correcting. Trying to guess when the stock market may head lower in the weaker six-month period is diffi cult at best.
Overall, the weaker six-month period tends to be weaker than the other six month period of the year and tends to have larger drops. Period. In any one year, there are times when the stock market will rally, but over the total six month period on average the stock market tends to have mediocre performance at best and is fraught with risk.
There are a couple of exceptions to the six-month unfavorable period. First, there are sectors of the stock market that tend to perform well relative to the S&P 500 in the six-month period. Some sectors have their strong seasonal period within the weaker six month period for the overall stock market.
Second, the broad stock market often has a seasonal rally in the last days of June into mid-July as investors often push up the stock market ahead of the Q2 earnings season. Overall, the entire six-month unfavorable period for stocks tends to have a weak risk-reward relationship.
Seasonal investing does not get caught up in the latest fades or trends that can end in a heartbeat. It is not emotional. It is about allocating to investments that over the long-term have worked at certain times of the year with the assistance of technical and fundamental analysis. Seasonal investing is not growth. It is not value. It is not momentum. It is all of the above at different times of the year based upon long-term seasonal trends.
Read/Download the Brooke Thackray's full June 2020 seasonal investing update below:
Copyright © Brooke Thackray, Alphamountain Investments
