There are more "Things that Aren't Supposed to Happen" than in any time I can recall. I am talking about how some stocks are acting so "incorrectly" versus the long-held playbook, that I don't even know where to begin.
You know I scan my charts every weekend, and this weekend, the weekend of our Teach In, I went over them with a cool eye toward what seems to be working and what doesn't, to see what I am missing -- because from what I heard, there's a ton of things that aren't supposed to be happening.
Let's start with housing. Here's an absolutely crazy conundrum. We know rates are going higher. We know that we could be facing multiple Fed short-rate increases in 2018.
So, what should be the single worst group? I would argue that it would be housing. But when you look over the charts, what is perhaps the single best group when it comes to the new high list?
Pretty simple: the homebuilders. The market isn't even bothered to be distinguishing which ones are good and which ones are weak: they are all flying. Of course, this could be the ETF-ization of the group, as there is so much money going into the PHLX Housing Sector HGX ETF. We have companies as diverse as Radian (RDN) and LendingTree (TREE) roaring well beyond what should be expected. But it's really about Toll Brothers (TOL) , Pulte (PHM) , Lennar (LEN) , KB Home (KBH) and Horton (DHI) .
The playbook says we should be shorting these stocks aggressively. I have no doubt that the playbook has to be right, eventually. However, you can't have an ETF flying up unless there are some good things happening.
When I go over the homebuilders, I come up with three points that could be driving the bus: 1. Rates are still historically low, so low that we have to wait 100 basis points before we even think about them, 2. It is so difficult to get enough land to build on, and the big homebuilders took advantage of the downturn to buy acreage and 3. Homes are so scarce, that the price of the homes is advancing faster than the costs, so the gross margins are all very bountiful.
If that's the case, then this group can be bought right into the teeth of the hike, although I would wait to see who the new Fed chairman is before I would act. I think any of them other than Yellen would mean that the bulk of managers would be concerned about faster hikes.
Second group that makes no sense? The action in the utilities. There is no doubt in my mind that this group should be being hammered. I can't imagine a soul who would want to actually buy these stocks if they were trading in a vacuum versus rates.
How is it possible? I think some of it might be the strength of the U.S. economy. Last week I interviewed the CEO of American Electric Power (AEP) and his numbers, despite the storms, were incredibly strong because of demand. That's right; the utilities, for the first time I can remember, might be trading as industrials -- something my writing partner Matt Horween pointed out to me just yesterday.
Final group that's trading incorrectly, so to speak? The banks: We know that if the Fed keeps raising, we will have an inverted yield curve and that will signify that a recession is upon us.
But the rationale for perhaps the strength in this group? I think it's the fact that history has shown that right before you get an inverted yield curve you get a run in the stocks, as it has historically been a bountiful time for the group.
I think that one of the biggest challenges for managers is that we are so out there, meaning that history's not helping stock selection. But in a real bull market like this one, we make exceptions to the playbook and we "rally to the occasion" so to speak.
No matter. It's happening, it's true, and it makes a mockery of the bears who have told us, endlessly, that these stocks could not be doing what they are doing when they are doing it. They are.
That's all that matters.
