"Rotation." Will It Continue?

by Greg Rieben September 16, 2019

The word "rotation" was used many times last week to sum up the recent strength we've seen in materials (XLB) and financials (XLF) or what many call "value" stocks (IVE).

Momentum stocks (MTUM) mostly in technology and more specifically software (IGV) were hit hard last week and many are quick to call it a "rotation into value".

Will this shift in leadership continue? It's difficult to say for certain and as expected the opinions vary. From Barron's:

The big question for investors, of course, is whether this shift will continue. A trio of Wall Street firms has the answers: absolutely, probably, and not really. JPM points out that recent trading has unwound only about the past five months of outperformance for momentum stocks. “The extreme divergence...is bound to further rebalance,” its strategists wrote on Thursday. According to Bank of America Merrill Lynch, investors are underestimating the ability of central banks to fuel stock gains with a “liquidity supernova,” and as stocks broadly rise, value will likely continue to shine.

As a trend follower I look to the stronger and often leading sectors for opportunities. Right now it's a mixed bag as some of the lagging sectors start to show strength from the "rotation" that we're seeing. I'll be watching oil/gas, basic material stocks as well as transports to see if they can follow through from last week's strength.

Even with the "rotation" occurring out of tech/momentum and into value, I'm still seeing potential setups across multiple sectors/industries such as semiconductors, select software, and gold and silver.

I think it's too early to make a call that the bull market in software and technology has come to an end. Technically the up trends are still intact and many individual names appear to be only pulling back or correcting.

The major indices continue to trade at or near all time highs and the "lagging" small caps (Russell 2000) rallied 5% last week. Small cap stocks are now threatening to break out of the summer trading range and make an attempt to get back to the August 2018 highs.

This is not bearish.