As best I can tell the two main instigators to yesterday’s market rotation were tax reform and interest rates. Kevin Muir has an interesting article talking about a tax related shift from growth to value stocks for your consideration: Tax Reform Rotation
As usual with this market, we have a lot of conflicting indications. For example, the leading Semis have gotten whacked vs. both the S&P 500 and the Nasdaq 100 (which also go hammered) but the Russell 2000 was positive. Growth got hammered vs. value and yet S&P 500 participation is actually increasing as the ‘equal weight’ ETF rises.
Growth vs. Value did indeed get croaked yesterday, but only as a correction to the uptrend.
As of now, the bigger picture is absolutely fine for Growth vs. Value.
Tech leadership failed the Ascending Triangle but is still not broken and will not be broken until/unless it makes a lower low to October beneath the SMA 200 (black).
Nominal NDX may actually be tempting the buy-the-dippers. This could be a ‘sell the news’ drop since many large tech titans stand to gain big benefits with the new corporate welfare package. Folks, I am all for lower taxes, all things being equal. But please, large corporations gained years of welfare already in the form of outrageous Fed policy and now stand to get a double dose of benefits. More to come publicly on that editorial comment I’d guess.
Semis vs. Tech is making a big move, however. This is a notable breakdown. For reference, we had a fundamental theory about why the Semis were overdone per this post on Nov. 21.
Semi vs. SPY is also breaking down on the daily.
Small Caps vs. SPY looks prospective. As a side note, a reminder that the Small Caps are thought to appreciate a stronger dollar due to a high percentage of their businesses being done domestically.
Here is the multi-panel view of several sectors in relation to SPY. Financials did what they would do with a L/T yield spike. Industrials as well. But Energy and Materials are also usually positively correlated.
The KBE/SPY ratio may finally be getting in gear with L/T interest rates. If this stays on track it feeds the intermediate view of a rise in L/T yields to the limiters (along with other macro indicators like stocks vs. gold and the yield curve reaching the ends of their trends) before significant changes come about.
Moving on to some indicators, the ‘man in the middle’ is absolutely stable in his long-term breakout.
Junk vs. higher quality bonds continued to bounce within its gentle downtrend. So there was no alarming signal yesterday.
As the damn machines came flying out of the FANG stocks and other momo leaders, the participation of the equally weighted SPX increased. That’s not an unhealthy sign for the market as it rotates sectors.
Why even the latest Dow Theory non-confirmation was blown up… to anyone’s surprise?
This is not a market that looks ready to correct imminently. Sure, the Semi breakdown is a concern but maybe that horse has been played for all he’s worth. Plenty of other places for casino patrons to hide. This chart of counter-cyclical and/or risk ‘off’ items vs. SPY shows a fully bullish stock market situation. Gold miners and Treasury bonds vs. SPY have a similar look. That will come in handy for the miners when risk goes ‘off’ but the problem is, risk is not ‘off’ right now and yesterday does not seem to changed that much. You can see that Value/SPY did indeed bounce, but is still down trending.
Bottom Line
We’ll review again on Sunday but risk remains ‘on’, stocks remain in bullish trends (with Semis a conspicuous suspect) and it appears the rotation game is back. The rotation is likely to be in line with tax policy and the interest rate picture. The Fed is due to raise another 1/4 in December, the yield curve is flattening (supportive of risk ‘on’ until it stops flattening), L/T yields have some real estate up above before they reach the 10yr (2.9%) and 30yr (3.3%) limiters and the stocks vs. gold ratios do as well.
