FTDS - A 'Reluctant Rotation' Has Begun
2023-12-04 20:00:00 ET
Summary
- We have seen a big rotation out of tech and into financials, small caps and all sorts of under-performing sectors that have done little so far in 2023, until now.
- It is a bad idea for 90% of the gains in the S&P 500 index in 2023, going into the November rally, to be driven by just ten companies in the index.
- The question that needs to be asked is whether Treasuries see something bad on the horizon, or are they reacting to falling inflation? We won’t know until after the fact.
Instead of seeing a normal correction, which happens more often than not when the market has been going straight up for four weeks, we have seen a big rotation out of tech and into financials, small caps and all sorts of under-performing sectors that have done little so far in 2023, until now.
One commentator called it a “reluctant rotation” last week, but reluctant or not, it is a positive, since it is a bad idea for 90% of the gains in the S&P 500 index in 2023, going into the November rally, to be driven by just ten companies in the index, and although there is much to be desired on the broadening front of this latest rally, the breadth of the market surely improved over the past week.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
A 77 basis-point (0.77%) drop in 10-year Treasury yields from their October highs, earned a miracle in the stock market, as inventors were worried, and rightfully so, that the binge spending of the U.S. government would choke off the U.S. economy. But the question that needs to be asked is whether Treasuries see something bad on the horizon, or are they reacting to falling inflation? We won’t know until after the fact.
I would like to note, though, that before the recessions in 2001 and 2008 (the latter starting in December 2007), the stock market was very weak in the typically strong fourth quarter of the year. The market has been weak in the fourth quarter before without a recession following, but right now the rally is broadening out, which is a sign that at least for the moment, stock market investors don’t see trouble on the horizon.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The horrendous gap between the S&P 500 Equal Weight Index and the more widely followed S&P 500 Index is still here, and it likely won’t close for a while, but I do believe the gap will likely come closer by the end of 2023.
I am not expecting a big correction between now and the end of the year, even though any type of welcome selloff of 1-3 days against the major trend, which is up , can come at any time.
Overbought conditions in a strong trend get resolved in one of two ways – by time or price. Either the market corrects and continues to rally, or it goes sideways and then resumes the uptrend.
We are definitely resolving the extreme nature of the stock market’s stretched rubber bands to the upside with time , so far.
One worry I have is that the S&P 500 is about to tag its high for the year at 4,607, and so it is similarly overstretched to the upside, if not more so, compared to where it was in July when we set that high.
The RSI reading on the S&P 500 is 73.44, which is extreme when it comes to a major index. Such extremes over the past year have resulted in corrections of 1-3 weeks , not days.
Since it is now December and the rally is broadening out, I don’t believe the correction will be very big, and we are likely to see further gains in the stock market between now and the end of the year, so any trading above 4,607 should be viewed with suspicion in light of the fact that RSI readings will be 75 or higher, if that happens.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
A Better Example of Unsustainable RSI
If you want to see what “extreme” looks like, then take a look at Germany, where the DAX Index registered RSI readings of 79.38 last Friday.
RSI readings on major indexes rarely stay above 70 for long, and it is even rarer for them to stay above 80.
The correction in Germany might not be very big, but it is likely to be sharp, and it may come this week. As to what triggers it, we can’t know that ahead of time.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
There are 131 points between where the DAX closed on Friday and its high for the year. It would be very unusual for the DAX to make a new high and keep going higher, and it would be normal for the index to pull back 300-500 points so that the rally is more sustainable.
The problem with overstretched markets is that when they rally without a correction, the correction tends to be bigger when it comes, so if you are bullish from an intermediate-term perspective, you actually should want to see a market pullback sooner.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
A 'Reluctant Rotation' Has Begun