The 2 Big Trends in Tech

There are 25 billion chickens on earth. What's cooler is that the chicken is the closest living relative of the Tyrannosaurus Rex. But the bird made news for a ridiculous reason last week. House Democrat Steve Cohen was trying to skewer Attorney General Barr for blowing off his hearing. He sat down and started eating a bucket of Kentucky Fried Chicken. His performance got mostly sour reviews, but I think that misses the point. Maybe watching an old dude crush fried chicken is entertaining to some, but it takes away from more serious issues.

Many are perma-bears on the market. I'm perma-bearish on financial media. I think it does the same thing as the finger-lickin'-good stunt. Most daily noise takes away from what is really going on behind the curtain. Let's put the drumsticks down and take a good look.

I just spent a week at a conference where bright minds gave their biggest investment ideas. I'll get to mine in a moment, but a main theme was that people are bearish on stocks. I heard many reasons like high valuations, historical analogs and simply: "The bull market's 10 years old!" This is often stated as a foregone conclusion: "Everyone knows the market has to fall from here – it's only a matter of when – right?" I heard this just before I told a room filled with 100-plus people why the big bull is just getting started.

Speaking with multi-billion-dollar money manager Louis Navellier on Friday, he said it best: "There's just nowhere else to go!" He's right. Europe is a mess. Germany and Italy teeter in and out of recession talk. Brexit is a major ulcer. China has made progress but hasn't resolved trade issues with the United States. Latin America is just downright ugly, especially with Argentina and Venezuela woes. Talk of civil war is never a good thing for investor nerves

These pain points help ship capital right over here to the United States. And when it comes, Treasuries don't offer compelling returns like equities. Dividends earned on U.S. stocks are taxed at long-term capital gains rates, while bond interest is taxed as ordinary income. Bonds also don't offer the capital appreciation potential of U.S. stocks. And with nearly half the S&P 500 having reported earnings, 77% beat earnings expectations, and more than 60% beat revenue estimates. That isn't bearish, people.

My investment point of view came from big buying I see in the market. I've been talking about this for a long time. Without going over the same ground, the biggest buying I am seeing is in semiconductors and software. I think these two groups are raw fuel for a bull market. When big investors like hedge funds and institutions plow cash into these groups, it's very bullish for stocks.

Last week saw strength in stocks, especially small caps, despite turbulence under the surface. Earnings season is seeing outsized reactions to reports. Some companies meet or beat earnings, but if lower guidance is issued, they pay the price – literally. Stocks have been routinely seeing 10% to 20% downside reactions to lower guidance warnings. But here's the thing: I think good stocks will bounce right back.

Performance of the major indexes over the past week and since Dec. 24 lows

We saw big buying again last week in tech, financials and Industrials. Selling occupied energy, health care and materials. This general theme has been playing out since Christmas lows.

Unusual institutional (UI) signals by sector

Based on Mapsignals' scoring methodology, info tech is our strongest sector, but semis and software are the standout industry groups. This is the power of the current tech rally.

I decided to comb through our 30 years of data. I wanted to see how current buying in software and semis compared to our nearly 650,000 overall signals since Jan. 1, 1990. The first thing you should know is that big buying outnumbered big selling for all stocks 58.5% to 41.5%. That makes sense given the overall bull trend over that time. Looking at the sectors, we see that health care, info tech and utilities accounted for the biggest imbalance of buying versus selling. The weakest sectors in terms of unusual buying were real estate, energy and telecom.

Let's focus on information technology: when we dig for what accounted for that buy imbalance, we see – you guessed it, software and semiconductors. What's significant is that 62% of signals in software and semis since 1990 were buys. But it's when you get to the bottom of the table that your eyes should pop. Since New Year's, semis saw 95% buy signals, and Software saw 90% – that's unprecedented.

Big buying and selling by sector since 1990

Don't let the market's chicken eaters distract you from the real trend. The game is software and semis. The biggest market players have been fanning the flames for a bullish growth trend. Pay attention to the big stuff. Like Mark Zuckerberg says: "Figuring out what the next big trend is tells us what we should focus on."

The Bottom Line

We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Technology and industrials stocks see the most unusual buying, making the sectors best in class.

Disclosure: The author holds no positions in any stocks mentioned at the time of publication.

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