Momentum Monday – Rotation Into Cyclical Stocks

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The S&P 500 tested its rising 50-day moving average, bounced and finished the week at new all-time closing highs. What’s different this time is that the typical stocks that have been pushing the market for many years (tech) are 20-50% below their highs from February. The leaders have been mostly cyclical stocks which is something you see at the beginning of a new bull market, not the end. At least, this was the case in 2003. Nowadays, the government and the Fed have an even bigger role. What matters is that capital iis not leaving the market; it’s merely rotating between sectors. Growth is not that scarce anymore and interest rates are rising, so there have been new leaders in the market for the past 3-4 months – home builders, semiconductor equipment, financials. retailers, oil and gas, transportation, restaurants, industrial metals, etc. I don’t know if this is just a blip or it’ll last longer. Such sector-wide trends usually persist for many months. 

It’s not just rising interest rates and a major increase in supply that is pressuring  tech stocks. The drop started because of those reasons but accelerated by the liquidations of some highly-leveraged momentum hedge funds. The talk is that Bill Hwang’s Archegos Capital had to liquidate his entire $15 Billion position on over $80 Billion gross notional exposure (he was levered 5x). He had big positions in Chinese tech giants BIDU, TME, VIPS; broadcasting stocks VIAC and DISCA. If the later is true, we might soon see a bounce in many of the oversold tech stocks.

The constant talk of chip shortage is clearly impacting the price action in semis. There were so many major breakouts on Friday – AMAT, UCTT, LRCX, KLAC, KLIC, etc.

The lack of housing supply and the expectations of a big infrastructure bill is bidding homebuilders and industrial metals. So much strength in steel, aluminum, copper on Friday. The homebuilders ETF closed at new all-time highs.

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