Sentiment is one of the most underrated aspects of the stock market. When sentiment gets too negative that means those who have wanted to sell have sold and there aren't a lot of people left to dump stock.
That's exactly what happened Monday when the market soared higher across the board, even the Dow, which was kept down by a tragic crash involving a second of Boeing's BA new line of smaller jet planes.
How can you tell that a move is about sentiment?
Simple: when the tinder for the rally comes from a couple of high profit upgrades -- in this case Facebook (FB) and Apple (AAPL) -- as well as a takeover bid by one-time-darling Nvidia (NVDA) for Mellanox Technologies (MLNX) , an Israeli semiconductor company, that a year ago would have been met with derision but Monday was greeted with euphoria.
Let's examine this textbook rally and put it in context so you know how to spot overly negative markets.
This morning at 4:30 a.m. I saw the stocks of Apple and Facebook jumping higher at the same time as Europe was solid, China looked good and oil was stable to higher.
Why does all of this matter? Because rallies can be spotted well ahead of time. You just need to watch the crawl underneath the anchors as they talk.
I had anticipated some sort of rally because of the way the stock market closed Friday despite the weak employment number. When you start with a big downdraft based on a number which indicates, if you didn't asterisk it, that a recession was coming, and then you rally, it's highly unlikely that there is anything out there that can reverse that trend.
You know I told you Friday I wasn't buying that number. There was too much wrong in the country, from government shutdown to terrible weather, for me to believe it was a true depiction of our economy.
But forget about me. Ten years after Ben Bernanke called the bottom on the stock market by saying that he wasn't going to let another big financial institution go down the drain Fed Chief Jay Powell agreed to sit down with 60 Minutes and all I can say is has he ever learned how to handle the media in six short months. Back in October of last year he didn't understand the power of his word when he called for multiple rate hikers to cool the economy even if it meant overshooting it.
Then he backtracked and got more prudent and patient and the bull market resumed.
I keep hearing catcalls about his reversal, that it was based on Trump that it was because of the stock market.
That's just crazy. Powell made it real clear Sunday night how independent he was and is about Trump's parries. More important he recognized that a host of factors turned mixed, including data from overseas and it simply wasn't the correct thing to keep tightening. He's not appeasing Wall Street, he's worried about Main Street as he should be.
The economy dictated his thinking. The stock market was simply a manifestation of the economy. For that we are going to crucify this man?
Now go back to that 4:30 a.m. tape. I am a tape reader from way back and when I saw the stocks of Facebook and Apple running that was a sign that we were going to get big upgrades Monday.
Sure enough Nomura Instinet went hold to buy on Facebook, with a statement piece entitled "A New Story to Tell" and Bank of America upgrades Apple saying "Risk Reward Turns Favorable, Ten Reasons to Be Bullish."
Here's the amazing thing about both of these pieces of research, they are like Seinfeld, a show based on nothing. The new story to tell at Facebook? I didn't see any in this piece. The main thesis? "The transition to Stories appears to be faster than we thought." May be faster than Nomura thought. But it's been out there for ages.
What really happened here? I think that we were out of new negatives for Facebook. In fact, what we got last week was Mark Zuckerberg calling for a kinder, gentler Facebook that will regard you as more than just chattel. Huge win for the people. Now last week we were fretting that Facebook would gate its most important constituency -- you. That sent the stock down to the high $160s.
But upon further review Nomura correctly, I believe, knows that most people use Instagram to tell stories to everyone, including those they don't know. Sure no one wants to be buddies with an outfit that the New York Times described as pretty darned sleazy in a piece from last November entitled "Delay, Deny and Deflect: How Facebook's Leaders Fought Through Crisis." Still, though, it hasn't lost users. It's gained users and it's become a real cheap stock, especially because we understand that the company is going to slash costs over time.
As nothing new as the Facebook upgrade was, the Apple bump was without anything salient whatsoever. What are some of the ten reasons to be bullish? How about gross profit dollars reversing from declines to growth in the second half. Known! How about loyal user base. Known! How about strong free cash flow with the possibility of M&A and capital return. Known! How about a growing installed base of users. Known!
The only thing really new here is the possibility of a re-acceleration of service revenues because the Chinese aren't cracking down that much on gaming. Thin gruel. But as someone who has stuck by his "own it, don't trade it" mantra, I am happy with the upgrade.
And how about that Nvidia buy of Mellanox? We know that Nvidia's been weak because of an overhang of crypto currency and gaming chips. The side of Nvidia we still love, though, artificial intelligence and data science, got a huge boost from this $6.9 billion buy, not just because it helps in the fastest-growing part of computing but that it also blocks Intel (INTC) from working with a company that would have given the semiconductor giant a lot more optionality of its formula of ever-increasing power with smaller size -- Moore's law runs out of juice as visionary CEO Jensen Huang has repeatedly said. It may be defensive versus Intel but it allows Huang to play offense which is why I predict a slew of upgrades on the heels of this purchase.
Now if you go back to the morning, away from these two stocks we were, correctly, shrouded with gloom from the tragedy of an Ethiopian airliner that went down in a similar way to that of an Indonesian airliner not that long ago. Both were Boeing (BA) 737 Maxes, which is an incredibly popular plane. It would have been completely legitimate if that bellwether stock had led us down but we had collectively gotten too negative on stocks and anybody who wanted to sell got a good chance Friday to unload their positions.
I know you may think that it is time to take some profits. Others might say this rally can't last. You have an opportunity to get out well above Friday's lows so why not take it.
My position is that rallies based on a sentiment switch are often among the best kind. Think of it like this. If you are an analyst and you have been in your foxhole for the week because the shelling was so heavy, do you think you are going to come out of that hole and be negative?
Nope, it's the opposite. I believe you will get a host of like-minded calls. Why not? With Nvidia's stock rallying more than target Mellanox, with the negatives for Facebook pretty well spelled out and it's real cheap and with Apple's stock rallying on something that's been true for years? Why not do some upgrading yourself? That's certainly what I expect from Tuesday's session.
