C.J. Lawrence Weekly – Cash Can be King Even When You’re Bullish

Whether it’s the machines at work, or faster fingered traders, when the market shifts, it happens fast. The week after Thanksgiving provides a good example of how quickly sentiment can change, and how dramatically and demonstrably the market reacts to those shifts. For months, pundits have been calling for a market correction based on a variety of technical factors. While the broader market has failed to deliver that correction, the sector rotation experienced during the week after Thanksgiving was fierce. One can debate the catalyst that launched the rotation, but it seems to us that the U.S. Senate’s announcement that it had the requisite votes for tax reform, set the rotation in motion.

Within milliseconds of the headlines hitting the newswires, traders and machines bought the tax beneficiaries (domestic companies that would benefit from lower domestic corporate tax rates) and sold less tax-advantaged stocks. The rotation bid up many year-to-date price losers and sold the winners. The biggest gainers during the two-trading day period were Broadcasters, Department Stores, and Food Retailers, all of which had negative year-to-date price performance to that point. Between Friday and Monday those group indices were up 6.3%, 5.8%, and 3.9% respectively. The losers were Software, Semiconductors, and Health Care Suppliers which had all posted 30+% price gains year-to-date.

8%- 10% performance differentials between winning and losing groups were not uncommon during that two-day rotation. The broader market did not experience a correction, but many sectors and groups did.

While the market’s recovery from fundamentally driven corrections, like the recession of 1990-1991, the popping of the internet bubble and subsequent recession in 2000-2001, and the financial crisis of 2008-2009 can take months, and even years, its average response to technical moves can now be measured in days. After the “flash crash” in 2010, the S&P 500 needed only five trading days to recuperate. When Greek banks were closed in 2015 to stave off collapse, the S&P 500 needed just 11 days to recoup the 2.6% dip it experienced during that period. When the Brexit vote was tallied in 2016, the S&P 500 sold off 5.3%. It took just 10 trading days to retrace the decline. Many of the losers in the post-Thanksgiving Day rotation have now regained most or all their declines. The point is that corrections and rotations, and the reactions to them, during periods of economic stability and/or expansion, are happening within increasingly compressed durations. Investors looking opportunistically for attractive entry points to high conviction ideas now have narrow windows in which to execute their strategies. Having plenty of dry power available, and the ability to put it to work quickly, have become strategic imperatives in today’s fast-moving market.

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