Weekly Update

Market Rotation Points to More Strength

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Published August 14, 2020


This year has certainly already been one for the ages in many ways, including in the stock market. Stock prices have experienced both one of their steepest drops in history as well as one of their most impressive rallies. Bonds have delivered stock-like returns so far, while some commodities have soared – looking at you gold and silver! The market has rewarded both defense (bonds, gold) and offense (high growth tech/consumer stocks). The latest twist in the market has been a notable rotation into cyclical sectors, many of which have been lagging for quite some time.

Let’s start with a look at the market leadership – it’s been tech/consumer for as long as anyone can remember. Since kicking off its current uptrend in April, the QQQ has not even come close to dropping back for a visit with its 50-day moving average, a closely followed reference line indicative of the intermediate-term trend (the blue line below). We can see that in the current and previous uptrends for the QQQ, the blue 50-day line was never a factor. The Pandemic Plunge was but a few week interruption for this powerhouse group of stocks.

QQQ 50-day moving average

Lately, other sectors have shown life and begun joining in. Transportation stocks, among the most cyclical of sectors, has broken out (blue arrow) and gone vertical this month. All those online shopping packages are fueling a boom in FedEx and UPS, as one driver of the new uptrend.

Transportation stocks have broken out

Retailers and home construction are showing no signs of a weakened economy, as they explore new high ground.

Retailer stocks explore new high ground

Home Construction stocks explore new high ground

Meanwhile, the virus-driven biotech stocks have seen investors lose some interest. Not long ago, biotech was the hot sector as the race for a Covid-19 vaccine and therapies hit warp speed. Now, they are heading down while cyclical, economic recovery stocks head upward.

Biotech stocks have seen investors lose some interest

Even the work-from-home megastar, Zoom, has rolled over, falling below its 50-day moving average for the first time this year.

Zoom below its 50-day moving average for the first time this year

The market has changed. This shift in sector favorites is a bullish development for stocks. The nonstop rise of the top 5 market mega-weights (Apple, Amazon, Microsoft, Facebook, Google) could only last so long. The market was either going to find more stocks to support the uptrend, or the uptrend was going to come to a halt. The recent cues are the former – widening support for the market and an uptrend that remains. As we enter the nervous part of the year for stocks, late August through October, anything could happen, especially this year. However, right now, it looks like the market is full of optimism and getting stronger.

Market Update

Investors seemingly took a break this week in quiet end-of-summer trading. Congress failed to deliver any new pandemic-related economic support package, which perhaps kept investors on the sidelines. Monday saw stocks tick higher by +0.3% with the “post-pandemic” trade very hot. Shares of cyclical materials, energy, and transport companies, including beleaguered airlines and cruise-liners showed strength. A series of executive actions signed by President Trump attempted to prod Congressional negotiations, though the legality and breadth of the moves was unclear, perhaps explaining the market’s tepid response. Strength in financial shares marked Tuesday’s trade as interest rates shot higher. Concerns over rising inflation appeared to drive the upward thrust in rates along with a possible shift in investor confidence toward the economy as safe haven investments generally performed poorly. Stocks finished -0.8% lower after flirting with a record close earlier in the session. Tech/consumer stocks rebounded strongly Wednesday sending indexes to a +1.4% gain. Money continued flowing out of safe havens like bonds and gold to fuel the lift in stocks. Thursday brought news that initial jobless claims fell below 1 million for the first time in 20 weeks. However, stocks offered little reaction, closing off -0.2%. Friday brought flat trade despite the 3rd straight month of rising retail sales, continuing signs of a modest, but possibly slowing, economic recovery.

Stocks ended up largely marking time this week with the S&P 500 turned away from record high ground. The broad market index closed higher by +0.68%. The Nasdaq 100 (QQQ) added +0.25%. Smallcap stocks finished +0.59% on the week.

Warm wishes and until next week.