It's a winner-takes-all market these days. Giant market growth stocks that are actually delivering real organic revenue increases are booming and getting ever larger. Companies that are struggling are being sold off relentlessly.
This has been a wild year already, like most any other year, really, except that it's been a stock-picker's dream market. Names like Disney (DIS), UnitedHealth (UNH), Starbucks (SBUX) and many more march at or near new all-time highs on strong fundamental growth. On the other hand, Valeant (VRX), Caterpillar (CAT), IBM (IBM) and any others that aren't delivering consistent earnings and revenue growth are getting killed.
Winners and strong charts are the name of the game. Part of what makes this a "Tale of Two Markets" is simply the embodiment of the money coming out of the losers in tech like Twitter (TWTR), Yelp (YELP) and GoPro (GPRO), along with the aforementioned big-cap losers.
Money that's fleeing the energy and commodity sector is looking for a new home too. Oil, natural gas and other energy subsectors have all been in utter collapse this year, making the "peak energy" argument and those who invested in the belief that energy prices would never cycle lower again look rather foolish. And when you have real money on the line, as this website's name makes clear, being foolish will get you thrown out of the game, as investors take their money out and find trends and managers that didn't fail.
Hedge fund managers, mutual fund managers and money managers of all stripes are now finding themselves chasing the winners -- especially high-growth tech stocks -- higher, trying to make sure they have some winners in their portfolios, so the fund investors cut them slack for having far underperformed and/or delivering substandard results this year.
The hedge fund industry suffered a $95 billion decline in assets, to $2.87 trillion, during the turbulent third quarter, according to HFR. As measured by the HFRI Fund Weighted Composite Index, the industry saw a 3.9% performance drop in the third quarter, taking the barometer into negative territory for the year at minus 1.5%. At this pace, hedge funds will turn in their worst annual performance since 2011. There are trillions of dollars invested in these hedge funds and mutual fund managers are moving around and creating a vicious cycle for the loser stocks and a virtuous cycle for the winning stocks.
I recently spent time on the phone with a long-time subscriber to my Trading With Cody service, who had gone against my approach of sticking with secular growers and avoiding cyclical sectors like energy, resulting in him having lost a bundle of money. Like anybody else who's tried to make any long bets in the energy sector at any point in the last year or so, he was trying to find that fleeting bottom in the sector stocks.
I've explained all along my reasons for remaining bearish on energy/oil as the production/demand cycle played out in a very classically cyclical manner that anybody paying attention to the energy sector over my lifetime should have seen coming. I'd met this subscriber, a 50-ish pharma sales rep, at a few of my speaking events over the last five years and he's desperate to figure out a plan to get back into the winners. In his email follow-up after the call, he wrote: "Congratulations on your big wins, Cody. ... How I wish I had stayed with your recommendations and not listened to the other 'experts' at all."
All of which makes me wonder if these trends are about to reverse. Market trends reverse; this winner-takes-all, "Tale of Two Markets" trend will play itself out and reverse at some point, too.
Of course, the big problem with trying to anticipate such a trend reversal is twofold: There are reasons to continue investing in great, revolutionary concepts like Amazon (AMZN), Alphabet (GOOG, GOOGL), Apple (AAPL), Facebook (FB), Netflix (NFLX) and others that have been the big winners over the last one, five and 10 years. Second, stock prices and market trends often go further and last longer than anybody believes they can.
If, like me, you were scaling into more long exposure and even buying stocks back in the August panicky lows, it's probably not a bad idea to do a little trimming after many of these stocks have now rallied 30% or more from those lows. Likewise, if you were short energy for the last year, which I unfortunately wasn't despite having been so bearish on energy, it might be time to lock in some of those gains. You don't have to be all in, all out, all long or all short at any given time.
It's been a hell of a run being long the revolutionary growth stocks this year, especially for the last five years. It's been a hell of a run being short struggling stocks such as Valeant and Pandora (P). I've been working hard to find these kinds of longs and shorts and balancing our portfolio and trying to stay ahead of the big trends (see all my Latest Positions on Trading With Cody).
That said, I've been trading and investing for many years. There have been times like this when I've felt really smart, and as I noted last week, that's usually just about the time that everything reverses on you. So let's not step off the gas pedal or ride on our laurels, but let's be disciplined, smart and flexible. Let's continue to strive for more home runs.