Just as stocks were flexing their muscle with a breakout above 4,000, we find ourselves in a curious place. That being a switch to defensive stocks as the market leaders, says Steve Reitmeister, editor of Reitmeister Total Return.

Steve, that doesn't sound very bullish, does it?

No...it’s definitely not bullish. But it is not necessarily a permanent state of affairs either. So, we will concentrate today's commentary on this intriguing turn of events.

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Market Commentary

Traders and investors are on the defense. This is kind of a mind bender when the bull market is up nearly 100% year over year. All the while the economy is improving. Not to mention the Fed and Treasury could not be MORE accommodative.

So what gives?

The coronavirus is spiking around the globe and yes, on the rise in the US once again. Let’s take a look at the worldwide picture with the graphic below:

new cases

Yes, we are right back to the highs set at the end of 2020 after a meaningful decline. New variants are part of the problem. Plus, we finally see the spike in India that was always feared for the world’s second largest population. And yes, even in Europe and other places they are enduring a new wave of cases.

Back in the States we are 80% lower than the peaks set a few months ago...but if you look closely, they are starting to rise a bit from bottom. Yes, this flies in the face of the logic that we are rolling out vaccines at an aggressive pace. However, some of that is causing lax behavior in some parts of the population and we see higher cases as a result.

So the trading on Tuesday was very much a reversal of the “Back to Normal” action leading the way the past several months. Airlines, hotels, cruises, restaurants, and the like all got beaten down bad.

On the other hand defensive plays in utilities and consumer staples actually ended the day in positive territory. Here is a chart from FinViz, which tells the defensive investment story that is in many ways the EXACT OPPOSITE of what was taking place year to date:

performance

We talked about needing to keep an eye on the coronavirus numbers in recent commentaries. Like this clip from the 3/16/21 RTR weekly commentary:

“Unfortunately there are new flickering flames coming from the coronavirus that could burn us if they start to rage higher.

I am referring to the new coronavirus lockdowns in Italy given more contagious variants is a trend worth watching. On top of that you have concerns about Spring Break happening in March and April that could lead to a surge in cases. Meaning that an unwelcome new wave of cases could indeed lead to more economic shutdowns and correlated stock sell off.”

Note that one day does not a trend make. So quite possibly this is just a fleeting move, like most inside a sector-rotation type market. This would mean that we stay put expecting the positions that fell the most this past session will come back roaring higher.

Then again, if the coronavirus stats around the world, and especially in the US, don’t start heading lower fairly soon, then this new wave of defensive trades could have greater legs.

As we look at our portfolio, our most direct trade on the coronavirus fading away is the US Jets ETF (JETS). That certainly took it on the chin today. KRE and TBT are semi related because flight to safety = lower rates = not so great for these two positions.

No doubt you see a lot more carnage in the portfolio beyond these three noted above. But that really fits in more with small caps getting bludgeoned (-2% Tuesday). And simply higher beta = higher risk = not the right place to be on a defensive day.

Putting it altogether, we are in wait-and-see mode with where the coronavirus stats go from here. Until proven otherwise I lean towards this being a fairly temporary situation with no change to our approach being necessary. However, I am willing to bend on that notion if there is convincing evidence to the contrary. Stay tuned...

Portfolio Update

The market has been unkind to smaller stocks. And back to normal stocks. And higher beta/growthier stocks.

So if you are wondering why any of our stocks are down of late...then reference the paragraph above and you have your answer. Outside of that, here are some other insights on our portfolio worth noting:

Timken (TKR): Shares gave us a brief little scare on a move under $80. Gladly it quickly bounced back above and stayed above since. And even on a day like Tuesday when it could have easily been decimated, TKR only backslid a little to $82.25. So I sense the worst is likely behind us with more upside to come.

360 Finance (QFIN): Good thing we didn’t enact a 10% stop as shares bounced back with a vengeance the last few sessions. None more impressive than the +6.57% gain Monday when most of the market was bathed in red.

Great write up of pros and cons of the stock by Aiden Research that agrees with my assumption that reward is greater than risk at this time. And why I am willing to ride out the volatility for it to move higher in time.

Yes it fell 5%. But that is just them blowing in the breeze of a nasty risk-off session. I say we rope ourselves to the mast of this ship to weather any forthcoming storms so we can hit profitable shores further down the road.

Semiconductors = Very Volatile Group (AVGO & KLIC): When this group is hot, there is none hotter. But when things go sour, it will leave an AWFUL taste in your mouth. Tuesday was a prime example of that with the group seeing a major sell off. Not surprising KLIC with its $3 bil market cap had a rough go of it. But then you see the $188 billion behemoth AVGO down just as much, then you appreciate that nobody in the group was spared the lashings.

Let’s not forget there is high demand for chips in the midst of a supply shortage. This trend will be in place for a while giving great odds of future outperformance. So easy to shake off yesterday’s ugliness expecting much more attractive results ahead. And yes, today the group was in better shape than most.

Alibaba (BABA): Am I concerned that BABA has given back half of their recent gains? Nope. Probably some folks wanted to get out on the first move higher. Now new buyers are coming aboard with expectations of much greater gains to come. So I would expect a rebound and sustained move higher to be soon in the offing.

J2 Global (JCOM): How I love ending the conversation on this leading stock in our portfolio. And yesterday it surged higher on pretty exciting news that they are splitting into two companies to better unlock the value of the tech/cloud side of their business by separating it from the online media side.

If you think back to the many commentaries on JCOM, I said the more people see this as a tech/cloud stock...the higher the valuation would be. And yes, splitting into two companies is the best and cleanest way to do it allowing more gains to unfold.

There is nothing pressing on this front for us to do as this transaction will take place sometime in the 3rd quarter. For now, it should help shares move higher from here and likely to touch the 100% gain milestone. As we get more details on the two separate companies we will determine if we are staying in one, the other, both or none. For now, just enjoy the extra gains as they roll in.

Closing Comments

The market doesn’t always go up 100% in a year. In fact, that almost never happens. Thus, one should never expect that pace of gains to last.

So if now is a time for a healthy market pause, then so be it. Our strategies have worked well in the past to carve out profits in range-bound markets given a superior stock-picking approach. And when the bull market is ready to get back on track, we will be ride there to ride it to new heights!  

Learn more about Steve Reitmeister at StockNews.com