If Tech Falters, Value Rotation Looks Real

If Tech Falters, Value Rotation Looks Real

Stocks were supposed to be on cruise-control this week. Without much economic data on the calendar and a limited number of big-ticket earnings, the steady bullish price momentum of the past several weeks should be enough to extend recent highs in the S&P 500. A pickup in crypto prices and strength in small-caps also point to increasing risk appetite.?

Yesterday's session suggests there could be a speed bump or two along the way. Disappointing earnings guidance from ASML (ASML) sent semiconductors reeling and a bad manufacturing print from New York put the first real bid into bonds in more than a month. Both of these moves are probably best described as temporary counter-trend reversions, but they're both worth a closer look.

The best way to think about ASML is probably through the lens of Nvidia (NVDA). ASML is a major supplier to Taiwan Semiconductor (TSM), the major producer of Nvidia chips. If the guidance reflects on those companies, the implications for the market could be very real. More likely is that ASML's legacy customers like Intel (INTC) are responsible for the disappointment, but the rejection of Nvidia right at its previous high leaves the possibility of a double top in its chart, which should keep traders on their toes for at least a day or two.

As far as bonds go, Treasuries were probably due for a little bit of a reset after a persistent sell-off that began with the Fed's 50 basis-point cut. The big question for investors related to that move is whether or not lower rates will spur a fresh cycle in the economy, which is what's been suggested by bear-steepening in the yield curve. It's a question still very much up for debate and will get an important update via tomorrow's retail sales, but yesterday's JB Hunt (JBHT) report suggests there may be an uptick in activity on the way.

Perhaps what's most exciting for investors is the momentum building around a rotation toward value stocks and classically cyclical sectors. Financial stocks including regional banks are leading the market this week after earnings, and transport stocks are trying to break out to a two-year high. Small-caps are following suit. The cyclical trade is a riskier, higher-beta style leadership that also may be showing up in crypto prices as bitcoin tries to break out. We've seen many head-fakes in this trade the past year, but this one looks like it carries real conviction.

Scott Allen

I help future retirees take full control of their retirement investments today

5 个月

Since the April pullback, aka the return to volatility, I've been doing leveraged defensive sector/factor ETFs, like UTSL (utilities), UGE (consumer staples), DRN (real estate), USML (low volatility), and QULL (quality). It seems counterintuitive to use leverage on low volatility, but the end results have been exceptional—way ahead of the market. IWDL is about the closest thing to a leveraged value ETF. It only started to break away mid-August, so it's pretty new on my momentum radar, but it looks promising. Definitely trending in the right direction. I know leveraged ETFs aren't everyone's thing, but it's a way to be aggressive while signficantly reducing firm-level risk.

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