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The Great Mini-Rotation: Investors May Move Into These Sectors Next


From the Buzz & Banter: Investors move their money from overbought sectors to weak sectors during a bull market, keeping the rally alive.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

Market Update: Stocks Are Strong

Barring some unforeseen sell-off by the close, the S&P 500 (INDEXSP:.INX) is up over 5% in Feb. and up a whopping 7% from February's low (1737). In a normal (non-QE) world, a 10% move for the entire year would be considered healthy. So, 7% in less than a month is very impressive and speaks to how strong the bulls are right now. Remember that markets do not go straight up, so be careful chasing stocks that have already had big moves.

Great (Mini) Rotation: The Heart of the Bull

Earlier today Todd Harrison had a great post [subscription required] noting weakness in a slew of high-beta names after a big move. So, how can the market hit new record highs if high-beta names are falling? The answer is a term I coined in early 2013: the Great Mini-Rotation.

In early 2013, everyone was talking about the Great Rotation (capital flowing into stocks and out of bonds). A closer look beneath the surface shows a Great Mini-Rotation unfolding, i.e, strong sector rotation. One of the hallmarks of a strong bull market (present market included) is that the major averages relentlessly rally. How are they able to do so if leading stocks pull back? They do this because capital flows to other areas of the market precisely at the time when overbought names (in this case the high-beta names) need to pause and digest their recent moves. Then, after some time passes, the new hot sector pauses and capital flows back into the former sectors. This cycle repeats itself time and time again.

For example, housing stocks and financials have been underperforming in recent months. Just yesterday, the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) broke out of a bullish 8-month flat base. Earlier today, the Select Sector Financial SPDR ETF (NYSEARCA:XLF) broke out of an advanced entry point within a shorter flat base and is setting up rather well to break out of resistance in the near future.

Negative Sentiment as a Bullish Indicator

It always amazes me how many people doubt (or hate) this rally. Since emotions are a key driver of stock prices, this (negative sentiment) is a very powerful bullish indicator. Remember that bull markets typically do not end in pessimism; they end in euphoria. They end when the last bear has been hunted down. This bull continues to do a great job of taking as few people along for the ride as possible. Hopefully, you are one of them. One way I overcome making emotional decisions is by trading on what I see happening, not what I think will happen. Remember to keep things simple. Always keep your losses small, and never argue with the tape. Trade wisely.
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