What do you do with a rally led by tech, oil and the financials?
You own it, that's what you do.
Before I get started on why I feel this way, let me say that I pay very close attention to sentiment, and we got some real eye-popping numbers this morning from the Investors Intelligence poll of newsletter writers. It turns out that only 35.4% of them are bullish, down from 40.2% last week, the lowest since February. Twenty-four percent of the writers polled are bearish, a six-week high, and the rest are calling for a correction, which is an eight-month high.
These numbers should make you stop and think, "Wow, are things that bad? Are they as bad as they were in February, when credit froze up and the economy worldwide took a nasty spill, with many companies on the verge of bankruptcy that had anything to do with oil and gas? The oil patch? Are things as terrible as when it looked like China was going to collapse and we were going to have a global financial crisis?"
I'd say absolutely not. That's ridiculous. Absolutely ridiculous. There is no way things are that bad. In fact, I would argue that even though there are many soft patches in the economy, we have some good things going, namely job growth and a sudden spurt in housing, which I always tell you punches well above it weight. Plus, we know that there's a pick-up in non-residential construction and retail isn't that terrible, provided you factor in Amazon (AMZN).
So the idea that there could be this many bears? That just seems plain wrong. I think many people are caught on the very wrong end of the seesaw here and are about to be sent flying by the bull who jumped on at the top and is going to slam his side into the ground, sending the bear to someplace he didn't expect, like the stratosphere.
In that scenario, what do you buy? When you have that many people who hate the stock market, what should you reach for?
Why, you should reach for the most hated sectors imaginable -- the banks, the techs and energy. Oil and water may not mix. But oil, banks and tech?
Nothing but Oklahoma Thunder Net.
Why the banks? OK, let's get started. First, the chief reason why everyone is so bearish -- and I am talking about a sudden drop-off in bulls -- is that in the last few weeks we learned that the Fed, after appearing to be on hold, is now off to the races with rate hikes, maybe one in June and maybe two more after that.
In that environment the financials roar. They are able to make much more money off your deposits, and that's the single-easiest risk-free for banks to generate gigantic earnings per share. The major banks in this country have gigantic amounts in accounts where they pay you next to nothing on the balance. You will still most likely make next to nothing after the rate hikes. Banks take forever to raise deposit rates. But they will immediately be able to invest your deposits at the higher fed fund rates and make fortunes on what is known as the net interest margins.
If we get a couple of rate hikes every bank in the country is going to coin money, but the most important thing is to be in the biggest ones: JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C). The first had an amazing earnings report and is brimming with deposits. The second is all domestic but with little of the exposure to the deadlands that are sales and trading of bonds, stocks, commodities and currencies. Plus, it is growing like a weed, and never forget that Wells is Warren Buffett's bank. Sure, it's expensive, but it is a fantastically run bank, and even though it has a lot of loans in the oil patch the rising price of oil has taken the pressure off the sector.
Bank of America has got a bunch of problems and has had some pretty specific oversight issues, but it has such a huge deposit base it would be hard to screw up. Citigroup? This is my new favorite because it just got a clean bill of health from the government in the living will tests, it just settled a big chunk of litigation with the government -- this time over an obscure LIBOR investigation -- and it trades at a humongous discount to its actual worth as expressed by the tangible book value of the bank. That would literally be the cash on hand if you shut the darned thing down. I think that when this bank gets the freedom from the government to buy back as much stock as it wants and return capital to shareholders like the old Citi in the form of a big dividend, it can quickly trade to $60 from $47, where it would be fairly valued. That's why my charitable trust, which you can follow along at Action Alerts PLUS, has been buying it so aggressively (it also owns WFC).
Yep, the bank group is unbelievably cheap and unbelievably hated. It's viewed as despicable by most managers. That's what you reach for when everyone is so bearish.
Next is energy. Oil is on the verge of my $50 target, where I expect that it will stall out. However, there are two issues at play that are causing a bid underneath, so to speak, to the oil stocks.
The first is that the inventories were very low when we got the report this morning. Now you might argue that the low inventories were caused by Canada being off line because of the wild fires. I say wait a second -- the dip was much bigger than the Canadian crude absence could have been responsible for. Second, here something that's telling from all of the energy stocks that went higher: they involve natural gas. Why? Because it's getting hot out there and traders are taking off all of their shorts. Natural gas has been flat-lining for months with a huge inventory overhang. But 90-degree temperatures in the Northeast have a habit of triggering air conditioners that can churn through that glut in a couple of days. The move makes sense.
Finally, there's tech. We got an amazing move in Hewlett Packard Enterprises (HPE) and Computer Sciences (CSC) today, the former up 6% and the latter soaring 37% simply by HP Enterprises spinning off its enterprise services business and having it merge with CSC. The fact that with a flick of a pen by HPQ's Meg Whitman and CSC's Mike Lawrie so much wealth can be unlocked is a testament to how cheap some of these tech stocks might be. I love the deal, but what I really like is that investors are so turned on by the new combination and by the better earnings that HPE reported this morning. This deal makes you think, as I do, that IBM's (IBM) stock might be too cheap, hence the three-point move, or that Microsoft (MSFT) could still be undervalued after rallying a percent and a half.
Meanwhile, one of Hewlett-Packard Enterprises' more booming business lines gives a great read through to Salesforce.com (CRM), which again hit a 52-week high.
Oh, and not to bury the lead, but the stock everyone purports to hate, the one backed by the so-called poorly run company that lacks innovation with its best days behind it -- yes, Apple (AAPL), which also is part of the Action Alerts PLUS portfolio -- roared higher again today. What's another 1.5% gain among friends?
So, when you get a rally that's unexpected with no real visible or obvious catalysts like the one in the banks and the oils, and when you build on a rally in the huge cohort that is tech, you begin to think, hmm, buy in the summer rally that's in May or go away. It's your choice!