Is This A Stock Market Sector Rotation Or A Mega Top In Process? – Mike Swanson (03/06/2021)

Over the weekend the Senate passed the Biden/Democrat stimulus bill, which extends unemployment benefits and will deliver $1400 checks to most Americans in a few weeks. Sunday night market futures were up big on the belief that this stimulus will help boost the economy and some of the money from those checks will enter the stock market. But this morning futures are down as the 10-year Treasury bond yield is ticking up above 1.6% again on fears of the deficit growth and inflation that will come. These gyrations over the past twelve hours are going to typify the type of moves we see in the markets going forward.

Last week we saw the stock market have a big rally on Monday and then dump until rallying hard on Friday. The S&P 500 and Nasdaq both ended the week down and so did the VIX to show that, even with these rapid gyrations and breakdowns in many stocks that took place, few stock market investors and traders that operate in the options markets feel any need to hedge their long positions. There is no panic and Friday took away many people’s worries.

Today most people simply focus on the day’s action in the market and base their fears and hopes around that. All it takes is one day up to get people excited and the reality is when so many people trade on apps and use apps like Robinhood to see what is happening in the markets all they are being shown are these daily swings, so they have no context to place the moves into in order to understand them. It’s like they are looking at one tree in the forest and science is showing that apps and screen time are altering people’s brains so they cannot see the big picture in just about anything, not even their own lives.

Using a simple hourly chart of the S&P 500 helps us understand what happened last week in the markets.

The S&P 500 has made two lower highs and now looks poised to make another one this week as it’s daily stochastics are heading to the over 80 level, which will bring it to an overbought reading. If it makes it there I’d expect it to fall below 80 within days to trigger another sell signal just like we got on Tuesday of last week.

The Nasdaq has been performing worse than the S&P 500 and the DOW.

I counted the Nasdaq close below the 13000 level last week as a second sell signal and even with Friday’s rally the Nasdaq and the Nasdaq 100 index remain below this level, which is now going to become a key resistance point in the markets.

In my view these wild swings in the market, and breakdown in the Nasdaq, represent a topping process that mark the start of a new dowtrend, which is coming after the S&P 500 hit its second highest valuation level in its entire history and the bond market has been trending down hurting stocks. All of this is happening after the markets recorded record margin debt and signs of speculative blow-offs in crypto and things such as short squeeze plays like in Gamestop in January.

What has been falling the hardest have indeed been the most favored stocks since April, the one’s that have attracted the masses and populated the top 100 list of Robinhood. One fund that has specialized in owning these stocks is ARKK and you can see how it is fading fast.

ARKK has already completed a top and most of the stocks in it have the same pattern. If you want to short individual stocks looking at the stocks this fund owns is a good place to start.

The number of stocks trading above their 200-day moving averages inside the Nasdaq has completely broken down. This is not happening with the S&P 500 stocks (at least not yet), so it shows how the selling has been focused on the most highly valued and faddish stocks so far.

Meanwhile, we have seen pockets of strength in energy stocks, REITs, and some other segments of the stock market. To some what is happening in the markets is not a mega top, but a simple rotation. One of the CNBC television superstars made this comment on Twitter this weekend.

The implication of this comment is that we are not in a big market breakdown, but a battle among sectors. So, it’s possible then that a winning sector can just go up and up from here. Many people obviously are buying into that idea and that is another way to look at the market instead of saying we are going into a correction or everything is going to drop.

On Friday, the DOW went up and is acting stronger than the Nasdaq and S&P 500 so some are seeing that as an example of a great rotation. If you look at the DOW, though, it is looking strong thanks to just a few stocks in it, mainly CVX, AXP, MMM, and CAT. Without them the DOW chart would look like the S&P 500 chart.

I actually own CVX.

Personally, I am still long about 60% in my main account. What I have done is taken multiple short positions in stocks and hedging by using short ETFs in the past two weeks and bought puts in LQD a few weeks ago. Coming into this year I was 60% long and 40% in “safety” trades consisting of several currency ETF’s. I sold that 40% “safety” position to put on these hedges. So right now I am operating as essentially an old fashioned hedge fund.

The first hedge funds, made in the 1940’s, were 50/50 long/short funds. This may sound complicated for a lot of people. A simple thing to do is simply reduce risk by taking some money off the table. In the end the BEST times to invest are AFTER the stock market has had a significant decline. The time to buy was last spring and not this January. Another great buying time will come, but in order to take advantage of it you have to have taken some money off the table at some point and then be willing to be patient. Can people who only base actions on daily price swings do such a thing in today’s day and age?

Whether this is a major stock market top in the process leading to a sizable correction, as I believe is likely, or a simple great sector rotation, one thing is clear – many of the former winners in big cap tech now have broken charts and are likely to now lag the S&P 500 going forward while new winning sectors are emerging. Energy is the most obvious example now and one simple trade I have on now is short ZM and long XOM. I like to use sell signals on the hourly stochastics for the S&P 500 and Nasdaq as timing signals for when to take short positions.

I talked with David Skarica of www.addictedtoprofits.net on Sunday about the big picture in the markets with bonds and the growing debt situation in the United States.

Share your thoughts or ask questions in the comments section below. Just scroll down to the screen to join in.

-Mike



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