Risk-off is never good for markets

January 7, 2024No Comments

I’ve noted on this blogsite that my preference over the few months has been to rotate into the overlooked stock sectors. I’ve suggested you largely stay away from overvalued mega-capped growth stocks. In fact, I have made a point in many blogs of suggesting we specifically stay away from technology and the “Magnificent Seven” AI stocks. Today, lets look at the neartermed rotation out of higher risk stocks such as tech and small capped stocks, and into industrials and prior underperforming sectors.

DJIA has the large capped leadership position

Below, we can see the obvious movement from the NASDAQ (blue line) and the SPX (black line) – into the Industrials (red line) and the NYSE composite. Basically, what we are witnessing is the tech-heavy NAZ & SPX take a back seat to the more diversified indices. The sectors lying outside of the NAZ leaders had been very “laggy” over the past year. The new rotation into value/ oversold stocks is exactly what I have been suggesting would  happen! This, given the mega overvalued status of tech and AI stocks in the SPX and NAZ.

You may recall the Bear-o-meter report I posted last week, where I noted that market breadth has become very widespread quite suddenly. I posted the chart of the % of stocks over their 50 day SMA’s, illustrating how quickly the market has moved into a broad number of sectors OUTSIDE of the mega-growth stocks. That widening of breadth is illustrated in the underperformance of the concentrated indices (SPX, NAZ) and the outperformance of the diversified indices (INDU, NYSE). Of note – INDU does hold MSFT and AAPL, but these tech stocks are relatively small weightings when compared to the SPX and NAZ.

 

Broad NYSE composite vs Medium & Small cap’s

Further proof of a potential move out of risk is seen by comparing the NYSE composite index to the small capped (IWM, red line) and mid capped (MDY, lime green line) indices. The chart below illustrates a massive move out of risk, and into other sectors via the broad strength of the NYSE composite index.

 

Sector performance

The sector performance rotation out of tech has been happening for about a month, but the meat of it really began with the Santa rally. FYI, the Santa rally began December 26th and ended January 3rd. The chart below encompasses that period, plus the end of last week to total 8 trading days.

Note the top performing sectors were largely defensives – prior underperformers. This resulted in the broader breadth numbers and better performing diversified indices as discussed above, and in my Bear-o-meter report.

I had a conversation with seasonal expert Brooke Thackray the other day. He shared with me that, when leading sectors (aka tech, NASDAQ, growth) see weakness – particularly during the traditional seasonally favorable periods – this is not a great sign. Risk-off is never great for the market. Risk-off during the seasonally strong period of the year is even more concerning!

BTW – Brooke publishes an excellent seasonal and technical analysis newsletter monthly – I highly recommend you subscribe if you do not already. Its free! And of course — if you don’t already, you can subscribe to this blog and the VT Update newsletter free by clicking here.

 

Conclusion

The risk-off trade is one more thorn in the markets side. Its early yet to determine if this is to be a macro-roation, rather than just a moment in time. Whatever the case….We raised a bit of cash during the Santa Rally – specifically 15% in the Equity Platform, and 20% in the Aggressive Strategy. This, given my recent technical observations of possible weakness in the near-term. I discussed this here and here. The sectors we are picking away at include staples, materials, industrials and financials. We’re also focusing on unique value plays, along with internationals markets. We recently began legging back into energy. We hold no technology or mega-capped growth stocks.

Craig & I continue to ponder on the potential of markets NOT materially cracking their 2022 highs – as I have discussed numerous times over the past two years in this blog. A prolonged sideways market is not an absolute, but we are quite open to that potential. If it does in fact prove to be the case, ValueTrend will continue to rotate in and out of cash and sector-rotate,  as appropriate.

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