S&P Sneetches Say Stocks Shift the Same
Today, we’re taking a trip back to childhood to discuss a famous Dr. Seuss story: The Sneetches.
(Actually, we’re talking about the correlation of S&P 500 stocks … but you’ll see where I’m going with this shortly.)
You see, Star-Belly Sneetches have stars on their bellies and Plain-Belly Sneetches have none. Then Sylvester McMonkey McBean arrived, and that’s when the fun begun. (What? It rhymes.)
If you remember your Seuss, McBean created machines that both removed and added stars to the Sneetches, rendering them all basically the same.
When it comes to the stock market, Federal Reserve Chairman Jerome Powell is our McBean. Well, Powell and the rest of the world’s central bank heads. Jerome’s “unlimited stimulus” helped create a machine whereby all stocks are basically the same.
Don’t believe me? Check out the S&P 500 3-Month Realized Correlation Index, because obviously everyone keeps that light reading on hand…
When stocks are correlated, it means they’re all connected or move in the same direction. A correlation reading of 1.0 means that all stocks rise when one stock rises. Right now, S&P 500 stocks have a correlation of 0.8, and the reading is holding steady. Essentially, all but 20% of stocks now move in the same direction at the same time.
High correlations typically occur during major market events, such as a pandemic market crash, when all stocks fall. But these correlations typically don’t last very long. Stocks return to normal trading and go their separate ways. After all, some companies are inherently better with earnings and revenue than others and are just better all-around investments.
However, we have an unprecedented level of market manipulation going on right now due to the Fed’s “unlimited stimulus” machine. The world’s central banks essentially turned all stocks into Star-Bellied Sneetches. They’re all acting exactly the same.
Now, the financial media will tell you that this high correlation between stocks means that active portfolio and fund managers are useless. I mean, if all stocks are now essentially the same, why do you need someone like me or other Banyan Hill experts to tell you what to invest in?
Anyone remember the end of Seuss’ The Sneetches?
That’s right: Sylvester McMonkey McBean took his machine and left. (Yes, literary people, I know I glossed over the whole “equality” message of the story, but we’re talking about stocks here.)
Sooner or later, everything will go back to normal. Jerome Powell will pack up his “Fix-it-Up Chappie” and go home.
When that happens, you want to hold real Star-Bellied stocks — not the ones that just went along for the ride. But is finding those star-studded champions easier said than done? I say nay nay.
Turns out, all you need is one simple rule to tell the wheat from the chaff. Just one rule that’s easy enough for anyone to remember.
And now … let’s sneak right on over to Reader Feedback Land.
Gather ‘round and open up those ear sockets; this week’s edition of Reader Feedback is on deck.
That’s right — it’s time to see what’s been on the Great Stuff hivemind this week. And if you haven’t written to us yet, try it out! You might just see your email in next week’s Reader Feedback.
GreatStuffToday@BanyanHill.com is our email address. Let’s get into it!
Searching for Sure Things
The only sure thing in this market is biotech that has dozens of CURED patients from COVID (but not preexisting conditions) and hundreds of trial patients without any side effects reported.
The company is CYDY, not GILD, nor any larger company.
— Paul G.
Thanks for writing in, Paul! For reference, Paul’s email came in on May 5, or about four supermarket runs ago in quarantime-keeping.
So, why are we still digging through the past? I wanted to check in to see how CYDY (and our pal Paul here) has fared, frankly!
OK, there’s another reason: There’s hardly any coverage on these over-the-counter stocks, and that can turn a whisper into the story of the century. In other words, whatever CytoDyn’s testing leads to, you can bet that everyone and their mother already bought the rumor and sold the news. (Insider profit-taking anyone?)
You’ll have to forgive me Paul, but CytoDyn is exactly the kind of biotech boom-and-bust “breakout star” that Great Stuff has talked about lately. You know, the ones that skyrocket on hopes, rumors and news bites?
That said, depending on your entry price … I hope you took at least some of those profits off the table! This sucker is in pure penny stock territory now, rallying over 1,100% since December. Buddy, I reckon that bull’s ‘bout to buck any second now.
Too long; didn’t read: Don’t go chasing waterfalls … or thinly traded penny stocks.
Big Bets Are the Best
Is craft king a buy?
Put down your knitting needles — raise those glue sticks high! The Craft King has come — the time to scrapbook is nigh!
Just jesting, I knew you meant DraftKings Inc. (Nasdaq: DKNG) — a stock that’s almost doubled in May alone.
As one of the only pure-play sports betting stocks out there, just remember … for the duration of this rally, there have been no real sports happening. Unless you can use DraftKings bet on pick-up games down by your local civic center or whatever … nada.
This bad boy’s trading on news, hopes and ultra simulated gambling fumes … at least until NHL starts its silent stadium round robin skate-a-thon.
That said, nearly anything that makes it to TV and streaming services right now is must-watch entertainment. And I know a ton of those gamblers turned traders we talked about the other day have kept one eye on their Robinhood account … and the other on betting sites like DraftKings!
So, do I think DKNG’s rally is overextended and warrants a pullback? Indeed. But will sports betting take a hold in the post-pandemic crash economy? Well, throw some more stimulus checks in the mix, and this will get real interesting…
Home, Home Again
Not being on the road so much, home non-stop for over two and a half months for the first time since 1992, has been wonderful. The key is having an amazing wife/partner to hang out with. … Sold all equities in the tax sheltered accounts on Feb 27. All signs showed that the world was about to change, though I could feel the FOMO feelings pulling at me as I clicked on each sale, since the stock market was so frothy still riding the long-term bull. Since then, we’ve taken advantage of buying stocks at bargain prices, slowly building new portfolios. Fifty plus percent of the positions are new stocks for us, since what will win now has shifted. Tickers like ZOOM, SHOP and AMT are doing great.
— Barry R.
Barry, you get an enthusiastic “my man!” from me. And I hear you 100% on the amazing wife/hangout partner front. (I promise she didn’t write that.)
Honestly, though, it sounds like you followed the Great Stuff plan (and your gut). I’m glad that it’s paying off for you — and that you made it into our triple-digit gain on Shopify Inc. (NYSE: SHOP).
So join Great Stuff and Barry: Fight the FOMO, everybody! I believe in you.
Great Stuff: Write to Us
That’s it for today, dear reader. Thank you for tuning in! Remember that you can always share your questions, comments and feedback with us here. Heck, you’ve heard enough of my rants and rambles — now I want to hear yours!
Until next time, be Great!
Editor, Great Stuff