February 28, 2021

The Nasdaq stabilized at lower levels late last week after the incessant back-up in bond yields eased. Technically, this is viewed as a mild positive.

From Thursday's intraday high of 1.61% to Friday's close of 1.46%, the yield on 10s fell 15 bps, quite a large move in less than two days.

Expectations of higher inflation have driven the higher yields. This has also played itself out in other markets, with recent strength seen in commodities and basic resource stocks such as the oils, metal ores, and steels. Also climbing the performance charts have been the shippers. 

Based on historical precedent which is discussed in this public blog post, a bull market generally does not end before going through a breadth divergence first. Popular measures of breadth show no such divergence at the S&P's recent high. Hence, the odds favor new price highs at some point before descending into a serious bear market (30%+ decline).

With that said, breadth is a long-term signpost and is not to be mistaken for a short- or intermediate-term timing tool. For that, we rely upon the behavior of the averages and the action of the leading stocks. Both do not indicate the coast is clear.

The growth sector is not a complete disaster, by any stretch. Some issues are three weeks into a base-building process. Names that hold up relatively well include Dermtech (DMTK), Pinterest (PINS), Snap (SNAP), and Transmedics Group (TMDX). These can be expected to snap back once the averages show some daylight. But bases are not to be found.

The game plan is to remain in a high cash position. Should the averages resume their up trends, the question will be whether growth continues to take a back seat to cyclical stocks. If so, at least a few growth names are likely to show leadership. These will be targeted, along with leading shippers and "upstream" oil & gas issues.

Regarding the latter, these would be the drillers, explorers, and field service firms. These usually have more sensitivity to the price of crude than the "downstream" groups such as the giant refiners/marketers like Exxon Mobil (XOM).

To be clear, venturing into cyclical terrain would only make sense if growth does not lead in the next intermediate-term market advance. I am not a big fan of cyclicals, but everything has its time and place. As noted previously, the shippers and fertilizers were absolute rocket ships in '06/'07. We will look at some of these cyclical groups in an upcoming video.

As well, I recall in '92, a year in which growth did very little following a major year in '91, that Bill O'Neil was speaking favorably on his TV show about the homebuilders and brokers, two clear cyclical groups.

In sum, cash is king. We will play the hand the market deals us on the next advance provided the setups are there.

Kevin Marder

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The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. Estimate data provided by FactSet. Expected earnings release dates provided by EarningsWhispers.