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MarketSurge powers the charts in this video.

One of the most prominent characteristics of bull markets is that they correct through sector rotations. We are seeing it again. Anything related to AI has been under pressure lately. NVDA and MRVL sold off after their latest earnings reports. AI data center component stocks like VRT and energy stocks like CEG, VST, and GEV are in a pullback mode. Despite that, QQQ and SPY are trading within 1-2% of their all-time highs. 

As AI is consolidating recent gains, there have been rotations into other groups:

Small caps (IWM) had a big-volume breakout after the Fed’s chairman hinted that there might be a time for a rate policy change. 

Chinese ADRs are starting to shine. BABA’s earnings were not impressive, but the stock went up 13% on huge volume last Friday when most tech stocks sold off. BABA is the leader, and many other Chinese stocks are acting constructively. 

Software stocks have underperformed for a large window of time this year. The premise is that AI is going to disrupt first software, anything except cybersecurity. This makes sense to me, but the software industry has many different companies with different opportunities ahead of them. MDB and SNOW had big earnings surprises last week and had significant gains on heavy volume. 

Not everything is calm in the market at the moment. We saw four distribution days in the indexes in the past couple of weeks heading into the historically weakest month for the market – September. Given the macro background is hard to expect a bigger correction right now, but a quick 4-5% shakeout is not out of question.

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MarketSurge powers the charts in this video.

It is said that we should pay the most attention to seasonality when it doesn’t follow the expected path, because it would not be priced in. This is exactly what has been happening in August so far. Historically, US stocks lose ground in August and September in the second year after the Presidential elections. Not this time around; at least, not so far. There are enough other catalysts to change the projected trajectory. 

The Fed’s chairman hinted that they might be ready to begin rate cuts. The market loved the message. Small caps gained 4%. Crypto, homebuilders,  and China were also among the best performers. The US Dollar was the biggest loser.

In the meantime, we are in the midst of the biggest deregulation of the financial industry in decades, which allows banks to use more leverage and regular investors to have access to more asset classes. It is an environment primed for degenerate speculation.

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MarketSurge powers the charts in this video.

Bull markets correct through sector rotation. Last week, we saw proof of that. While megacaps consolidated near their all-time highs, small caps erupted. The catalyst – smaller than expected consumer inflation, which is likely to lead to a rate cut later in the year. The premise is that many small caps need to refinance, and any decline in interest rates could have a big impact on their bottom line. This is why biotech and homebuilders were among the big movers last week.

Later in the week, the so-called producers’ inflation came above estimates, which led to a pullback in small caps. The index is still in an uptrend, and as long as rates continue to decline, it should keep making higher highs and higher lows.

In the meantime, crypto lives in its own world and has its own catalysts. 401 (k) accounts are now allowed to invest in crypto and private companies. BTC, ETH, and SOL made new multi-year highs before they pulled back later in the week. I wouldn’t chase them here. I would rather wait for them to set up again near their rising 20 or 50dma.

August and September of the second year after the US presidential election are typically red months for the stock market. We have not seen any evidence of that yet. There are select industries like software and cybersecurity that had sizable pullbacks, but the indexes have remained unscathed for the most part due to sector rotation. The government seems bent on the idea of inflating the debt via currency depreciation, so any sizable dip in the stock market is likely to be welcomed as a buying opportunity. 

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