Every month, we will release a portfolio review and macro-conditions outlook with any data we are using to guide our positioning. Now that the site has been live for over a year, we feel we are at the stage where a monthly portfolio review may be valuable to our readers. In this report, we address the growth vs. value theme that is playing out in this market, and why the divergence between the two can grow even wider. We also discuss why comparing this market to 1999 is not an accurate comparison. Finally, we take a look at our up to date portfolio allocation.

Macro Outlook:

Since the market bottomed on March 23rd, the tech driven rally that followed has more than recovered the loss we saw in the bear market from the February highs. So far, the recovery rally in the NASDAQ100 has returned over 83% from the lows and has provided no reasonable entries for cautious investors.

So far, the tech heavy NASDAQ100 (NDX) hasn’t provided a pullback greater than 7.3% since the rally began. Furthermore, each dip lasted between 2-4 days before buyers stepped in to continue the uptrend.

Furthermore, if we look at the RSI, which is a momentum indicator that helps gauge the health of a trend, on April 6th, the tech heavy NASDAQ100 (NDX) crossed above 50, and stayed above this important line until Sept. 8th. When the RSI is above the 50 line (in blue), it’s indicating that momentum is tilting up as the gains are outpacing the losses over a 14-day period.

Notice how strong this rally was based on the RSI. Each time the RSI tested the 50 line, it held. It wasn’t until September 8th that we saw the 50-line break to the downside, producing a tech led sell-off that had the NDX correct over 14%, so far.

Today, the NASDAQ100 has taken back this crucial line, and held the retest on Friday’s selloff. This is encouraging; however, we will want to see this trend continue beyond 60 on the RSI to further confirm that this is not just a corrective bounce.

Growth vs. Value

The fear for tech investors is that there will be an inevitable rotation out of richly valued tech stocks and into beaten down value stocks. I have no doubt that one day value will have a real rotation and demonstrate outperformance. However, the evidence supports any

There are usually cues in the relative price action of sectors/indexes that signal the makeup of the trend we are in. For example, the below chart compares the NASDAQ100, which is comprised predominantly of tech, to the S&P 500, which is a broad sample of the best stocks in all sectors of the market.

There is a common pattern in the broad market that seems to be playing out right now. Notice when NDX bottoms compared to the S&P 500 this year. The tech driven NASDAQ100 bottomed on March 16th, and then retested the lows on March 23rd, while the S&P 500 bottomed on March 23rd. In June, the exact same pattern played out – the NASDAQ100 first, followed by the S&P500. Today, this pattern seems to be playing out again.

If we dig deeper, an even more interesting pattern unfolds. Three times this year, the phrase “value rotation” has been used to explain the sharp sell-offs in tech and sudden increase in beaten down value names.

The above graph compares the NASDAQ100 (red) to the Russell 1000 Value index (blue). The below indicator is a relative strength indicator. When the blue graph dips below 0, it is showing times in which value is outperforming tech.

What’s interesting to note is the spread between value and tech leading into each new “rotation.” The first rotation into value saw a 19% spread between the two indexes. Then, leading into the second rotation, the spread was 26%. Recently, leading into the current value rotation out of tech, the spread was 31%.

This trend is suggesting that each attempt for the market to rotate into the beaten down value names has failed with tech continuing to lead the market higher. Until Tech starts to truly underperform and show significant and consistent misses in earnings reports.

A Deeper Dive into the Problem with Value

It would be hard to lump all value names into one category. Sectors like Transportation and Industrials, classic value sectors, have performed really well, both of which are just a few percentage points away from all-time highs. This is a further encouraging sign for the recovery underway because both sectors are highly sensitive to global economic activity.

However, in bull markets, we typically see all sectors participate in an uptrend, and when we do not see this, it is something that warrants caution. If we look at both Financials and Energy, a completely different story unfolds.

Energy

 

Energy is in a clear downtrend. Furthermore, this sector is disliked more today than at the March 23rd lows. All of the alpha that it produced in the initial recovery has been given back, as its downtrend progresses.

Financials

The same trend is present in Financials today, as well.

Financials appear to be in a downtrend, diverging from the rest of the market. Furthermore, and somewhat shocking, the below indicator compares the relative performance of this sector to the broad market. When it is above the green 0 line, it’s signaling that financials are performing better than the S&P500, while being below the 0 line means they are performing worse. You have to go back to 2008/2009 to find a time when financials are disliked as much as they are today.

Collectively, these two sectors account for roughly 12% of our economy in terms of market cap. However, they account for roughly 21% of total revenue in the U.S. economy. This is a large weight around the neck of the recovery that we will want to see corrected.

It’s also worth mentioning that the last time we saw financials diverge into a downtrend while tech/growth continued its uptrend was in 1999.

This is something we will continue to monitor, and we believe it will eventually correct. The rest of the market is quite strong, and proved that it is able to carry the laggards until we find a bottom and reverse. However, we want to be very clear that we do not believe tech today is like the tech market of 1999; rather we are seeing some divergences that have not happened in nearly two decades and this is something to point out.

The Problem with Comparing this Market to 1999

You don’t have to look far to see charts comparing P/S ratios between now and 1999. Many factors are at play in this beyond simple bubble talks. For one, Microsoft, currently has an annual Revenue of $143 Billion, with 13.6% YoY revenue growth. Furthermore, it accomplished this growth with 37% operating margin.

High revenue with healthy growth and high operating margins is a trend we see all throughout tech and other mega cap companies. Due to the efficiency of innovation, globalization, and the advancement of on-going microtrends, tech, like many stocks, commands (and has earned) a higher P/S ratio.

Also, regarding key differences between now and 1999, which are conveniently left out of the conversation, and are large distinguishing factors. For one,

• We are regularly seeing companies we track provides high double-digit, and in some cases, triple digit YoY revenue growth. If you are unfamiliar with microtrends, you miss the key differentiator between now and 1999. There was no microtrend driving prices. Tech was a convenience back then and lacked the strong fundamentals to drive price increases.
• 1999, the FED began raising rates. They continued to raise rates into 2000, even into the beginning of the 2000 bear market, in an attempt to quell inflation and slow down an overheated market. This, in turn, cut off loan growth, and eventually halted the growth of risk-on assets. Today, the FED is at 0 and recently announced they will stay at 0 through 2023. This is an attempt to fight deflation and encourage loan growth.
• In 1999 the yield curve was sharply inverted in the late 90s, which has been a solid indicator of a recession on the horizon. This is simply not true today. We saw the yield curve invert in early 2018-2019, which signaled the recession we are in now; however, though rates are very low, the yield curve has recovered to a healthy slope.

In conclusion, without a clear understanding of the nature of the microtrends in play, it would be easy to continually wait for a tech crash that simply hasn’t arrived. The economic environment is much more favorable for risk assets today than in 1999, which we believe will be a boon to continued tech outperformance.

However, please note that sentiment suggests that we can see another leg lower, which in fact, would be healthy for the long-term trend. However, the positioning of non-commercial traders and the AAII bullish % suggests any additional dip should be shallow and short lived.

Active Portfolio

 

During the current correction, we have initiated a number of buys due to our stocks hitting the targets that we outlined in past weekly market reports. Broad market analysis is important as a backdrop, but we tend to focus heavier on individual names primarily.

The reason why we focus on individual stocks over the broad market is that strong leaders within a bull market tend to bottom first and begin a new uptrend well before the broad market, which is what we are seeing so far in many of the names we track.

Additions to Current Positions

Regarding Zoom, Nvidia and Shopify – 3 of our favorite stocks – we announced on Monday, September 21st, that we were indiscriminately buying these names. In doing so, we were able to add to our positions close to their bottoms.

We have a large position in Zoom and are not as focused here due to its position size. However, we still want to add to Nvidia and Shopify. Nvidia, specifically, due to relative performance with Zoom over the last 4 weeks has pushed it down from our top position last month to our 2nd largest position. Nvidia is a high conviction idea, and we will continue to add to this stock in weakness and strength when the setups are present.

We also added to Roku and Marvell last week based on breakouts and relative strength. We love both names and will continue to guide entries based on ongoing analysis.

Finally, we added to AMD just 5% above our target region due to buy signals we received at those levels.

Closed Positions

We closed our position in Inseego. Our draw to this small cap company was its positioning with last mile connectivity on 5G. However, its recent price action coupled with the high level of short interest in the stock, had us lean towards reducing risk and focusing on our higher conviction ideas. For now, Marvell will slowly get this allocation.

We also stepped away from BigCommerce, as well, but don’t be surprised if you see us initiate here. We are watching this one very closely.

New Positions

We laid out very detailed setups for a number of stocks that we would like to own or add to. Here is a list of these setups with links:

Inphi
AMD
Teladoc
Docusign
Marvell
Bandwidth
Microsoft
Datadog
Shopify
Twilio
Nvidia
Fiverr

We were able to execute on a number of the above setups. For example, Teladoc, Docusign and the majority of our position in Inphi, aswell as a new tranche of AMD, were all executed within a few % points of our downside targets. We were able to add shares of NVDA, ZM and SHOP close to their lows, as well.

However, some of the setups have not manifested – BAND, NFLX, MSFT, DDOG. We will be updating these targets as the market progresses. As long as the S&P 500 is below 3400-3420, the downside setups indicated above are still active. Above this level and we will shift our game plan to our traditional base and breakout setups.

We further added to AMWL on its IPO date, and will look to add to this stock as it continues its uptrend. For reference, the last IPO Beth was adamant about was Zoom, and so far, this little talked about IPO is performing better than all the hot IPOs that garnered press.