Headed into the long weekend, the Semiconductors (SMH) had been on a very impressive run over the prior five days.  As shown in the snapshot of the US Groups screen in our Trend Analyzer, the group was the top performer (up just under 10%) in the five days ending last Thursday.  That move brought it from well below its 50-DMA to deep into overbought territory.

While the Semiconductor ETF (SMH) is up again today, it is still over 1% below its highs from mid-February.  Meanwhile, the Philadelphia Semiconductor Index (SOX) has already broken out to a new record intraday high this morning.

Today’s gain for the SOX adds to a 9.5% gain for the index last week.  As shown in the chart below, that 9.5% rally is historically large, especially relative to the past several years.  In fact, the five-day gain through Thursday’s close stands in the top 5% of all five-day runs for the index.  While there was another occurrence as recently as the five days ending March 15th, moves of this size have been fairly uncommon in the past decade.  Prior to the most recent and March occurrences, the only other recent instances were in November and the spring of last year.  Prior to 2020, the past decade only saw a small handful of other instances of rallies in the 95th percentile or better.  Conversely, the volatility of the Financial Crisis and the late 1990s and early 2000s led to more frequent clusters of top 5% moves.

In the charts below, we show the performance of the semiconductor index following rallies that rank in the top 5% of all 5-day changes without another occurrence in the prior two weeks.  The results show that there’s typically a near-term cool-down period after such a sharp one-week rally.  One and two weeks later have both tended to underperform the norm (by 42 bps and 90 bps respectively), averaging declines with positive returns less than half the time. While there has been some near-term weakness, one month and a quarter out have both tended towards outperformance.  Click here to view Bespoke’s premium membership options for our best research available.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

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Archegos

One of World’s Greatest Hidden Fortunes Is Wiped Out in Days by Katherine Burton and Tom Maloney (Yahoo! Finance)

The family office of a disciple of legendary growth investor Julian Robertson ran a stock portfolio with tens of billions into the ground in the course of just a few short days. [Link]

Credit Suisse Bid for Tidy Archegos Fix Ends With Banks Brawling by Sridhar Natarajan and Donal Griffin (Bloomberg)

As Archegos’ portfolio was melting down, its prime brokers tried to stick together, but several banks started liquidating blocks of stock instead of holding the line, driving the entire group to sell at the worst possible time. [Link; soft paywall]

Demographics

U.S. Church Membership Falls Below Majority for First Time by Jeffrey M. Jones (Gallup)

For the first time in the history of Gallup’s polling, less than half of Americans report that they are a member of a church, synagogue, or mosque. More than three-quarters did at the end of World War 2, and more than two-thirds did in the mid-2000s. [Link]

Older Millennials Are Closing the Wealth Gap With Their Parents by Rachel Louise Ensign (WSJ)

Recent years have seen the wealth gap between younger Americans and their Baby Boomer parents decline after running dramatically behind for years following the global financial crisis. [Link; paywall]

Strong Economy

America’s Imports Are Stuck on Ships Floating Just Off Los Angeles by Kara Dapena and Dylan Moriarty (WSJ)

While the Ever Given got all the attention in the Suez, the bigger traffic jam is arguably found closer to American shores as dozens of ships wait for LA/Long Beach port capacity to free up. [Link; paywall]

Tilman Fertitta says he’s been surprised by strength of his restaurants and casinos in March by Kevin Stankiewicz (CNBC)

The CEO of the holding company which owns brands like Joe’s Crab Shack, Morton’s Steakhouse, and Golden Nugget casinos reports people “are going out in huge numbers now” or even “blowing numbers away”. [Link]

Pandemic Fails

Johnson & Johnson’s vaccine is delayed by a U.S. factory mixup. by Sharon LaFraniere and Noah Weiland (NYT)

A confusion over which ingredients were going where led an employee of a subcontractor to use AstraZeneca ingredients in a batch of Johnson & Johnson vaccines, ruining as many as 15mm doses of the one-shot vaccine. [Link; soft paywall]

The Pandemic’s Wrongest Man by Derek Thompson (The Atlantic)

At every turn, gadfly Alex Berenson has mislead, confused, and just generally been wrong in his widely-followed analysis of the COVID epidemic; this is at least a start on exhaustively cataloging his litany of errors. [Link]

Investing

ARK Innovation ETF’s Approach is Ill-Timed for a Major Twist by Robby Greenwald (Morningstar)

While cost-competitive, ARK Invest’s ETFs are dependent on portfolio manager Cathie Wood and at risk of extreme concentration, while holding very large exposures relative to the size of the companies it invests in that could create major liquidity stress. [Link]

Industry Analysis

Methane pollution soars in US as shale drilling resumes by Justin Jacobs (FT)

With oil prices up after COVID, shale drillers are back in business and with them are methane emissions, a potent greenhouse gas which is released as oil is fracked. [Link; paywall]

How HUD and NAHB Created the U.S. Housing Crisis by James A. Schmitz Jr., Arilton Teixeira, and Mark L. J. Wright (Minneapolis Fed Working Paper Slides)

A compelling argument that protectionist efforts by the traditional homebuilding industry to prevent market share gains for much cheaper manufactured housing has had innumerable pernicious effects on the broader US economy. [Link; 80 page PDF]

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Have a great weekend!

Please click the image below to view our April 2021 market calendar.  This calendar includes the S&P 500’s average percentage change and average intraday chart pattern for each trading day during the upcoming month.  It also includes market holidays and options expiration dates plus the dates of key economic indicator releases.  Start a two-week free trial to one of Bespoke’s three research levels.

The S&P 500 has risen around 2.5% to new record highs and crossing the 4,000 milestone in the past week.  Despite this, optimism took a slight step back this week. The Investors Intelligence survey of newsletter writers released yesterday saw a lower share of respondents report as bullish; down from 57.4% last week to a three-week low of 54.4%. After coming in at the highest level in three months last week, the AAII’s sentiment survey also saw fewer respondents reporting as bullish.  Last week, over half of respondents reported as bullish for the first time since November.  Today, that reading has fallen to 45.8%.  Despite the less optimistic tone, the 5.1 percentage point decline was the largest single-week drop in bullish sentiment since only the first week of March and the current level still stands in the top decile of the past five years. It is also over 7 percentage points higher than the historical average of 38%.

As bullish sentiment came in at a multi-month high last week, bearish sentiment fell to the lowest levels since December 2019.  Bearish sentiment likewise saw a reversal this week as it rose 2.6 percentage points to 23.2%. Mirroring bullish sentiment, albeit off the low, the current level of bearish sentiment is still in the bottom 10% of readings of the past five years.

Those inverse moves in bullish and bearish sentiment have resulted in the bull-bear spread falling 2.7 points to 22.6.  While that indicates a less optimistic tone than last week, the current reading shows that sentiment continues to largely favor the bulls. In fact, even after pulling back, the current reading sits in the top 5% of all weeks of the past 5 years.

While fewer respondents reported as bullish this week, not all of those jumped ship to the bearish camp.  Neutral sentiment picked up the difference rising 2.5 points to 31%. That is the first reading of over 30% and the highest since the first week of March when it had risen to 34.4%. While that is an elevated level relative to the past year in which sentiment has become more polarized between bullishness and bearishness, the current level of neutral sentiment is actually just below the historical average of 31.41%.  Click here to view Bespoke’s premium membership options for our best research available.

After coming in at a new low for the pandemic last week, a higher reading in initial jobless claims was expected this week with forecasts calling for a reading of 675K; up from a downward revision to 658K last week. Instead, claims rose by 61K to 719K.  Although that is the biggest one-week increase since the second week of January when claims rose 123K, at 719K this week’s reading still managed to tie the last week of November for the second-lowest reading of the past year. Additionally, we would also note that this week is the first to reflect the annual revisions to the seasonal adjustment factors for both initial and continuing claims.

Unadjusted regular state claims were also higher rising from 651.2K last week to 714.4K.  Again, this was the largest one-week increase since January. While regular state claims were weaker, Pandemic Unemployment Assistance (PUA) claims fell slightly to 237K.  That sets a new low for the pandemic save for the first week that PUA claims debuted roughly one year ago and the first week of 2021 when there was the caveat that there were some lapses in claims as a result of the timing of the signing of the spending bill. Nonetheless, the larger uptick in regular state claims meant that, on a combined basis, claims did rise this week. Granted, at 951.4K total claims remained below 1 million in back-to-back weeks for the first time in the past year.

Like initial jobless claims, continuing claims also came in higher than expected (3.794 million vs. 3.75 million expected). While claims were above expectations, they did improve from last week’s reading of 3.87 million to set a new low for the pandemic.  That also marked an eleventh consecutive week with lower continuing claims.

Factoring in all unemployment programs adds some lag to the data making the most recent data as of the week of March 12th.  That week saw a broad decline across all programs as combined claims fell from 19.768 million to 18.247 million. The program that contributed the most to that decline was Pandemic Emergency Unemployment Compensation (PEUC) which fell by over 700K claims. That marks the program’s fourth-largest decline of the past year. Regular state and PUA claims also experienced significant declines.

Recently we have noted how a rising share of total claims belongs to programs like PEUC that extend benefits past the expiration of the regular benefit periods. For example, the previous week saw two of these programs, PEUC and Extended Benefits, account for 36.9% of all claims which was the highest level of the pandemic. That large decline in PEUC claims in the most recent week alongside a modest improvement in the Extended Benefits program resulted in that share declining by 1.1 percentage points. In other words, there is some evidence that there has been some improvement in the reading on people who are facing long-term unemployment. Click here to view Bespoke’s premium membership options for our best research available.

The first quarter of 2021 came to a close on Wednesday, and while the first quarter of this year was not nearly as crazy as the first quarter of 2020, it was far from tranquil.  Below we provide a snapshot of our ETF Asset Class Performance Matrix summarizing the total return of ETFs across the investment spectrum during the month of March, Q1, and for all of 2010.

Given the carnage we saw in some areas of the market recently, it may not seem that way but March was a very positive month for US equities across different styles and sectors.  At the index level, the Dow led the way surging nearly 7%, but the S&P 500 was also very strong, gaining more than 4.5%.  Large Cap Tech was an area of relative weakness, but even the Nasdaq 100 was up 1.71% (just about all of which came on the last trading day of the month).  Continuing a trend that has been in place all year, value stocks left growth in the dust, more than doubling the gains of growth stocks during March.  At the sector level, we saw both cyclicals and some defensives lead the way higher this month with Utilities rallying more than 10%, Industrials up 9%, Consumer Staples up 8.5%, and Materials up nearly 8%.  While no sectors were down in March, Technology lagged the most by rallying ‘only’ 1.76%.

At the international level, it was a good month for North America as Mexico rallied 7.8% and Canada surged 5.8%.  On the downside, the only country in the red for the month was China, which dropped 6.5%.  What’s interesting to note about the performance of international markets is that like the US, a lot of areas that lagged in 2020 were leaders in March and vice versa for this year’s laggards.

While inflation has been a concern for investors lately, it’s interesting to note that all of the commodities in the matrix were down in March with Silver (SLV) and Natural Gas (UNG) falling the most. In the case of silver, while it was the second-best performing ETF in our matrix in 2020, it was the worst-performing ETF during the month of March.

Finally, fixed-income investors have had a rude awakening so far this year.  While all of the fixed income-related ETFs saw positive returns in 2020, they’re all down so far in 2021.  Long-term US Treasuries have been the biggest laggards as TLT is already down 13.9% YTD.  So much for the ‘safety’ of Treasuries.  Click here to view Bespoke’s premium membership options for our best research available.

As we noted in today’s Morning Lineup and an earlier post, the Energy sector far and away has been the best performing S&P 500 sector in Q1. The sector is on pace to close out the quarter with a gain of just under 30%. That is nearly double the return of the next best performing sector: Financials.  Granted, Financials have likewise been on an impressive run, gaining over 15%.

As shown in the charts below, going back to at least 1990, Q1 of 2021 is on pace to go down as the Energy sector’s single largest quarterly gain on record. Amazingly, the next two quarters that stand as runners-up have both come within the past year. Those were last quarter when the sector rose 25.78% and Q2 of 2020 when it rallied 28.68%. For the Financial sector, this quarter’s gain stands in the top decile of all quarterly moves of the past three decades, and that follows last quarter’s 22.52% gain which stands in the top 5%.  As shown in the charts below, for both sectors, gains of 15% or more in a single quarter have been fairly uncommon with only a handful of past instances.

That brings to question if strong runs in one quarter result in rotation out of those sectors the following quarter.  In the tables below, we show the performance of the Financials and Energy sectors from the end of quarters with gains of 15% or more.  Starting with a look at Financials, that rotation has not necessarily always occurred as the sector has consistently risen over the following three months. Of the ten prior instances, there have only been two quarters, Q3 2009 and Q1 2012, in which Financials were lower by the end of the next quarter. Those were also some of the few times that Financials were lower at the end of the first and second month of the quarter. We would note, though, that the current instance is also the first time since 2009 that there have been back-to-back quarters that the sector has seen gains of 15% or more. Back during that last occurrence (Q3 2009), returns were in fact weaker after that second quarter of large gains.

As for the Energy sector, of the nine prior instances where the sector rallied over 15%, this was the first time with two sequential quarters boasting 15% or larger gains. Additionally, rotation out of Energy stocks has been far more commonplace. As shown in the table below, from the conclusion of those quarters with big gains, the sector has averaged a decline throughout the next quarter.  Click here to view Bespoke’s premium membership options for our best research available.

The first quarter of 2021 comes to a close today, and as fast as time seems to fly, it’s been a long one.  Take GameStop (GME).  It may seem like months and months ago, but it wasn’t until late January that the stock started to go crazy as the ‘Reddit Rebellion’ launched and caused a mad scramble by hedge funds to cover any and all of their short positions.  Think about it.  In under three months, we’ve seen at least two large funds (Melvin Capital and Archegos), not to mention the collapse of supply chain finance giant Greensill Capital.  Sometimes we go an entire year without blowups of this magnitude.

Despite the tumultuous headlines and market volatility along with the frustrating churn in the market lately, US equities are finishing off the quarter well.  Stocks in the S&P 500 are up an average of 11.9% so far this year and grouped by sector they’re all averaging gains.  Leading the way higher, stocks in the Energy sector stand apart from every other sector with an average gain of over 20%.  After Energy, stocks in the Financials and Consumer Discretionary sectors are both up an average of over 15%.  On the other side of the chart, sectors underperforming are generally defensive in nature with Health Care and Utilities both averaging YTD gains of less than 5%.  One notable underperforming sector given its size is Technology.  With an average gain of 7.2% YTD, stocks in the Technology sector are underperforming the broader market by more than 4.5 percentage points.

Given the underperformance of Technology YTD, we can’t help but remember some market ‘certainties’ over the years that never quite came to fruition.  Remember after the initial surge off the lows coming out of the Credit Crisis in 2008 and 2009?  While Financials were the best performing sector coming off the lows, the rally in the sector ran out of steam and stalled out.  All we kept hearing at the time was that ‘the market couldn’t rally without the Financials’, but rally it did.  Now, after Technology outperformed during COVID and through last Summer, the sector has stalled out, and we’re hearing the same phrase now as we did back then with the only difference being that Technology has replaced Financials as the sector that the market couldn’t rally without.  Since September 2nd though, when we first started to see the ‘Big Shift’ in the market, the S&P 500 has nearly tripled the return of the Technology sector, and despite Tech’s underperformance, the S&P 500 has still managed double-digit percentage gains.  When it comes to the old conventional wisdom of the market, investors would be best served by doing the opposite of Timothy Leary by ‘turning off’ and ‘tuning out’ all the noise.

In the tables below, we list the top and bottom twenty performing S&P 500 stocks so far this year.  Starting with the winners, L Brands (LB) and Marathon (MRO) are both already up over 60%, while another five stocks have rallied 50%+.  With the exception of HollyFrontier (HFC), which is up 39.9%, every other one of the top 20 stocks is up over 40% – in just three months!  What’s most notable about this table, though, isn’t what’s on it, but what isn’t.  Technology has a larger number of components in the S&P 500 than any other sector, but only one stock from the sector – Applied Materials (AMAT) – made the list of top performers, and only one other besides AMAT (Hewlett Packard Enterprise) made the top 50.

At the other end of the spectrum, there are only 13 stocks in the S&P 500 that are down over 10% YTD, and the 20th worst-performing stock is down less than 9%.  And while there was only little representation from the Technology sector on the list of biggest YTD winners above, there’s no shortage on the list of losers with eight of the twenty coming from that sector.  It’s only been three months, but stretching back to early last September, the market has gotten along just fine without the help of Technology.  Click here to view Bespoke’s premium membership options for our best research available.