Dovish words from Fed Chair Powell on Tuesday slammed the brakes on an 8.3% correction, producing one of the more memorable intraday reversals in some time. This rebound continued today, though the Nasdaq nevertheless lagged the S&P for the sixth day in the last seven outings.
The divergence between the Naz and the S&P is apparent when comparing the next two charts.
A relentless three-week rise in bond yields has been too much for the stock market to bear. This has conjured up images of higher inflation forcing the Fed to raise its key overnight rate. Bull markets generally live on borrowed time once the Fed has lifted its federal funds rate a few times.
But Fed Chair Powell on Tuesday said higher rates would not be in the offing "for some time." This, then, sparked Tuesday's dramatic reversal.
Two negatives cloud the immediate road ahead for the position trader of breakouts. First, there are virtually no pattern setups of five-week-or-longer bases. Second, a rotation out of growth issues and into cyclical stocks has left a void in growth's participation in the market's leadership.
Regarding the first point, is it possible that in five weeks' time there might be some growth issues with ready-to-buy five-week bases? Possibly. This is something to watch for, though just having the bases is not enough. Market participants must also have an appetite to buy the breakouts.
Historically, growth performs best of any sector when the Fed adopts an easier monetary policy. When rates are low, institutions' valuation models assign a higher value to growth stocks than to value/cyclical or defensive segments. However, at some point, once the economy appears to be en route to an expansion, earnings estimates rise for cyclical stocks. Institutions, then, become more attracted to buying cheaper cyclicals and a rotation out of premium-priced growth titles begins.
The last time cyclicals led the market for any appreciable period of time was in '07 when the shippers and fertilizers' charts looked like those of dynamic growth stocks. Candidly, the breakout player has been spoiled for a long period of time as there has been one growth stock led rally after another, year after year. Cyclicals were hardly heard from.
We must maintain an open mind as to what might occur as it happens. Every market cycle is at least a little bit different from those before it.
Six names were added to the Focus List for today's session. Five were triggered trades, and perhaps just one was a classic growth issue, Pinterest (PINS). This one did not get as far as some of the others. This might be a reflection of the relative weakness seen in growth recently. Time will tell.
There will be ways we can participate in any cyclical-led market advance. I am not averse to some of the commodity groups. One example is energy, and our Monday entry in the S&P Oil & Gas Bull 3x ETF (GUSH), +18% since then.
Plus, there will invariably be a few growth titles that institutions cannot help but buy. Twilio (TWLO), Magnite (MGNI), DermTech (DMTK), and Transmedics Group (TMDX) are all holding up well. In Tuesday's video I emphasized the latter two as holding exceptional potential due to their disruptive inventions. They are not buyable at present.
In sum, we may see some opps in the weeks ahead, assuming growth remains mostly unpopular. The key is to temper our expectations as to what might be possible in a regime in which growth is largely shunned, at least relatively speaking. There are no names on the Focus List for Thursday's session.
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The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held a position in TNA, though positions are subject to change at any time and without notice. Estimate data provided by FactSet. Expected earnings release dates provided by EarningsWhispers.