Bull markets correct through sector rotations; many and frequent rotations that can spin your head off if you try to keep up with them on a weekly basis. A couple of weeks ago, we saw capital leaving tech and healthcare and moving into the so-called “old-economy” sectors. Last week, we saw a rotation from hardware to software.
After a major rally, semiconductors are pulling back. Intel’s revenue projections are declining. Xilinx’s growth is slowing down. The semiconductor index (SMH) is up 33% year-to-date. A pullback is absolutely normal. All trends need pullbacks; otherwise, they cannot last long.
In the meantime, software stocks are finally waking up and starting to break out. Many of them are scheduled to report earnings in the next few weeks. Expectations are certainly quite elevated. Maybe, this is why we are not seeing a very enthusiastic market reaction to solid reports – AMZN, NFLX, MSFT, FB, etc.
After a 24% correction in the last quarter of 2018, the Nasdaq 100 (QQQ) has fully recovered and hit new all-time highs. A new all-time high after a deep correction is not necessarily the beginning of a new bull market but here are four rules of thumb how to approach it anyway:
The strong stocks that you want to buy on a pullback, won’t pull back to the obvious levels everyone wants them to. There’s a gap and go action across the board especially after strong earnings reports. It’s smart to develop a strategy that takes this price action into account.
The biggest mistake you can make in a bull market is not being patient with your winners – don’t micromanage and overreact to every small fluctuation. Find one or two strong themes and try to ride them for as long as you can. Pullbacks in strong stocks are buying opportunities and excellent risk/reward setups during bull markets. Develop a way to take advantage of that.
Some form of diversification can be helpful in a bull market. Many people forget that bull markets are low-correlation markets of stocks which mean there are good opportunities on both the long and the short side. Not all stocks rise in a bull market at the same time. While putting all your capital into just one or two stocks can help you achieve astonishing returns if you are correct, it can also lead to not making money in a bull market. You don’t need to own 500 stocks to be diversified. 7-10 are enough to do the trick.
Bull markets often correct through sector rotations. While one leading sector pulls back 4-5%, another steps up to take its role leaving the market averages like SPY and QQQ relatively unscathed. Trying to be one step ahead of the constant sector rotation can spin your head and lead to overtrading, which can be a costly mistake. You can’t catch every single mini-rotation. Focus on making money in a couple of big trends that you have identified.
While biotech, healthcare, and some software stocks are under pressure, the so-called old-economy sectors – finance, manufacturing, and transportation, are shining. Money never sleeps, indeed. It just rotates from one sector to another.
The Nasdaq 100 is at all-time highs led by the enterprise software giant Microsoft. Google and Amazon are not too far behind – both of them are setting up for potential breakout and have earnings due soon. Apple is back to a trillion-dollar valuation.
The best performing sectors after a deep market correction (like the one we had in the last quarter of 2018) are usually the ones that get hit the worst. Chinese names certainly fit that category. Most had a 50 to 90% drawdown in 2018; therefore, it should not be a big surprise that many Chinese stocks are among the best performing year-to-date.
CQQQ, which an ETF concentrated in Chinese tech stocks, is firmly back above its 50 and 200-day moving averages and with rising relative strength rating. It is setting up in a tight range near its year-to-date highs. If you look under its surface, you will notice quite a few individual Chinese stocks setting up for a potential leg higher. I highlighted a few of them for our members at Market Wisdom.
The current bull market continues to correct through sector rotation. While money is flowing into financials, semiconductors, energy, and software, healthcare and biotech have been under pressure as of late.
Will Disney+ disrupt Netflix or the new online streaming service is not a big positive for Disney and neutral for Netflix. We will know a lot more about how the market perceives it after Netflix’s earnings on Tuesday.
We also cover athleisure stocks – NKE and LULU are consolidating near all-time highs.