foxex: Shorts are out of Fashion

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Markets Fade on Trade Concerns, but 2019 is Already One for the Books.

Markets Close

Dow
25,985.16 -0.28%

S&P
2,792.38 -0.05%

Nasdaq
7,554.51 +0.07%

VIX
14.7 -3.10%

INV Anxiety Index
100.5 Neutral

US 10-Yr Yield
2.693 +2.16%

Credits: Peter Cade / Getty Images

The Trade Fade

U.S. markets stalled on more trade talk uncertainty Wednesday as U.S. Trade Representative Robert Lighthizer told the U.S House and Ways Committee that there is more to be done to reach a deal and to enforce one, "if" any deal is even reached. Lighthizer stressed the need for more enforcement around intellectual property and technology theft protection, in what many perceived as a reference to China's technology giant Huawei, a company that has been the subject of a U.S. investigation since the arrest and extradition of its CFO in December.

Perspective on the Markets

While this week has seen a slight cooling of the markets, 2019 is off to a historic start in terms of gains. After gaining 7.8% in January, the S&P 500 Index has added another 3.3% so far in February for a grand total year-to-date return of 11.1%. This is the best first two months of the year since 1987.

Ryan Detrick of LPL Financial put this statistic in a historical context:

"...Since 1950, the S&P 500 has kicked off the year higher each of the first two months 27 times...Incredibly, the final 10 months finished higher 25 of those times!"

If you want to get granular, zoom into LPL's chart to see the annual gains (and losses) when January and February start off strong.

Perspective

Historical records are always interesting and useful, until they are not. Trends like these get broken, like what we saw in 1987 and 2011. They should not be the basis of your investing decisions, but they can help you form your own opinions of where you want to put your money given your personal needs and goals. Back in December when markets were correcting, the prospect of an 18% gain in the S&P 500 in January and February was as mythical as Santa Claus. Markers of a Bear market and an impending recession were everywhere, and investors sold stocks and hid in cash at record levels. They sold at the lows and many missed a relief rally of historical proportions. No one can time the market.

What is more useful is to look at money flow. We talk a lot about mutual fund and ETF fund flows in this newsletter because it's as good a representation of what individual investors and portfolio managers are actually doing with their portfolios. Today, we are going to look at what we call, 'short interest'.

Here is our definition:

Short interest is the number of shares that have been sold short but have not yet been covered or closed out. Short interest, which can be expressed as a number or percentage, is an indicator of market sentiment. Extremely high short interest shows investors are very pessimistic, potentially over-pessimistic. When investors are overly-pessimistic it can lead to very sharp price rises at times. Large changes in the short interest also flash warning signs, as it shows investors may be turning more more bearish or bullish on a stock.

In essence, a high level of short interest indicates that many traders are betting the market will fall. Well...they are doing the opposite right now. Short interest for the S&P 500 is at its lowest level since 2007. Take a look at this chart from Goldman Sachs.

Why it Matters

Investing is about trends. We are in an uptrend so far in 2019. Trends don't usually reverse all of a sudden. They break down or break out over time. An unexpected event, or what Nassim Taleb refers to as a 'Black Swan', is the exception, but typically markets establish trends over the period of several days or weeks.

There is a saying in investing that 'the trend is your friend'. If you are invested for the long term, the trend is your friend right now. Money is flowing back into stocks and many are topping their 50-day moving averages. That's a bullish sign.

However... there is another saying in investing, and this one is attributed to Warren Buffett:

"(It is wise to be) fearful when others are greedy and greedy when others are fearful."

You can apply that lesson to anything in life, but it is very useful to keep in mind as an investor. Nothing lasts forever and trends come and go. Don't chase the market for fear of missing out, and don't let the headlines scare you into selling if it is not part of your long-term strategy.

Chart of the Day: Best Buy Shares (BBY) Jump 14% on Earnings Beat

Electronics retailer Best Buy (BBY) reported significantly better-than-expected fourth-quarter earnings and revenue on Wednesday morning. Shares of Best Buy surged more than 17% at one point on Wednesday to hit a high of $70.73 before ending the day at $68.82, up 14% from Tuesday's close. The retail giant reported earnings of $2.72/share (excluding one-time items) and revenue of $14.8 billion, both above analysts' estimates. The company reported that its stores saw brisk sales during the 2018 holiday season, particularly for electronic accessories used to play what may be the most popular video game ever - Fortnite. Further fueling investors' appetite for the stock, Best Buy also announced on Wednesday that it would be raising its quarterly dividend from $0.45 to $0.50, a full 11%.

As shown on the chart above, the Best Buy stock had been on a sharp decline from August to late-December of last year. Like the overall market, however, BBY made a sharp reversal around Christmas, staging a strong rebound and recovery that has endured. Wednesday's post-earnings market open saw a rare and massive gap-up that hit the stock's 200-day moving average just short of the $70 level. And volume was exceptionally high for most of the day. Looking ahead from a technical perspective, this 200-day moving average will be key in determining whether BBY will be able to sustain its earnings-driven rally. Any strong break and sustained move above the 200-day moving average would confirm the return of a bull market for Best Buy.