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Current Investment Style, Size, and Sector Rotations Sustainable?

Over the past month, sharp rotations have created excitements but also concerns. From the investment style perspective, money has entered value stocks at the expense of growth stocks. From a market-cap size basis, small-cap stocks have outperformed large-cap stocks, at least from a near-term perspective. On the sector front, former lagging S&P 500 Sectors such as Energy, Materials, Financials, and Industrials have rebounded sharply from their respective Mar 2020 bottoms.


So, the question then becomes - are these rotations sustainable? And are they short-term tactical shifts ahead of the end of the second quarter or is this the beginning of the longer-term structural rotation?


Several technical developments will likely give us clues as to whether this current rotation is temporary or is this a sustainable and longer-lasting investment shift. Attached below are various investment styles, size, and S&P 500 Sector RRG (Relative Rotation Graph) charts dating back to the 3/23/20 market bottom.


A brief review clearly shows technical improvements within the value, small-cap, and economically sensitive styles over the past few weeks. However, as you can see from the style/size RRG chart it shows Dow Jones Large-cap Growth Index (+25.7% over the past 10-weeks), Dow Jones US Growth Index (+27.1%), Dow Jones Mid-cap Growth Index (+31.0%), and Dow Jones US Index (+23.6%) continue to reside within the Leading Quadrant. Although some of the large-cap indexes and growth indexes have lost relative momentum they still reside within the Leading Quadrant. This supports the premise that a near-term consolidation phase may be developing within the Large-cap and Growth areas and once the consolidation has been completed, they will again resume their leadership roles from an intermediate-to-longer term basis.


The S&P 500 Sector RRG chart also shows two leadership structural growth S&P 500 sectors (i.e., Technology – XLK and Healthcare – XLV) that have slipped into the Weakening Quadrant. This hint of near-term corrections developing in the two leadership S&P 500 sectors. At the same time, two lagging sectors (i.e., Energy – XLE, and Materials – XLB) are entrenched firmly within the Improving Quadrant. Given their current positioning within the Improving Quadrant it more likely the Materials (XLB) sector can enter the Leading Quadrant. The strong price momentum in Energy (XLE) does not appear to be sustainable and can fall back toward the middle of the Improving Quadrant. Two S&P sectors (i.e., Consumer Discretionary – XLY and Communication Services – XLC) have moved decisively into the Leading Quadrant and appear to assume leadership roles. This may be an area to explore for both trading and investment term accounts. I would concentrate on the Consumer Discretionary and the Communication Services names that reside within the Leading and Improving Quadrants.


On another note, the Nasdaq 100 Index (NDX) rallied to a record high during the day before reversing direction and closing near the lower end of its daily trading range. This created a daily negative outside day. The last negative outside day pattern occurred on 5/12/20. This led to a 3-day correction of -5.28%. Given the sharp rally in Technology names and specifically the six top NDX components (MSFT, AAPL, AMZN, FB, GOOGL, and GOOG) it would not surprise us to see a minor correction develop over the very near-term. The S&P 500 RRG sector rotation chart also supports the basis for a near-term correction within the Technology sector. However, the major difference between today’s negative outside day and the 5/12/20 negative outside day is the current negative outside day developed near its all-time high (9,736.57). Nonetheless, it is important to note that since the NDX 100 Index and Nasdaq Composite Index (COMPQ) have led the US stock markets to the upside, the performances of these two key OTC markets are critically important to the sustainability of the current Mar 2020 rally and most important, will help to decide the next structural bull trend or the next structural bear market.


The attached NDX daily chart also shows a well-defined uptrend channel since Apr 2020 between 9,304 (key support) and 9,898 (key resistance). Three prior negative outside days on NDX (i.e., 4/28/20, 5/12/20, and 5/21/20) also led to NDX corrections of the magnitude of -3.99%, -5.28%, and -4.05%. The duration of the corrections was 3 to 4 trading days. A fourth negative outside day occurred on 6/4/20 as NDX tested its Feb 2020 all-time high (9,736.57). If the 6/4/20 correction follows the paths of the prior negative outside days induced corrections of -3.99% to 5.28% then this would imply an NDX decline toward 9,227.5 to 9,352 or a retest of the bottom of its Apr 2020 uptrend channel (9,304).


Investment Style and Size Rotations Source: Courtesy of StockCharts.com

S&P 500 Sector Rotations Source: Courtesy of StockCharts.com

XLY Components Page 1 Source: Courtesy of StockCharts.com


XLY Components Page 2 Source: Courtesy of StockCharts.com

Communication Services Components Source: Courtesy of StockCharts.com

Materials Components Source: Courtesy of StockCharts.com

Energy Components Source: Courtesy of StockCharts.com

Nasdaq 100 Index (NDX) Source: Courtesy of StockCharts.com

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