Is The Great Rotation upon us?
Or is this the umpteenth head fake of 2017?
I am talking about the transition of the market focus from technology growth stocks to reflationary value stocks, which some analysts have been predicting, too soon, since January.
You can be forgiven for anticipating such a shift ahead of time.
After all, the leading FANG stocks, (FB), (AAPL), (NFLX), and Alphabet (GOOG), have all been on a meteoric tear for six months, and are still up close to 40% this year.
However, the sector has close to a monopoly on long-term organic growth, no debt, giant cash hoards, and is engaging in massive share buy backs.
It has all been enough to keep institutional investors paying up, at least until now.
I have to admit that even I, the greatest technology bull of all time (after all, its imprudent to speak ill of your neighbors) have recently been getting a little jittery.
So last week’s Trade Alerts were all about hedging my downside risk.
My existing put spread in the United States Treasury Bond Fund (TLT) was already doing some of my work for me, and was paying off handsomely.
I slapped on vertical bear put spreads for Apple (AAPL) and Facebook (FB), turning my call spreads into iron condors.
I added another put spread for the S&P 500 (SPY) in case the entire market starts to roll over.
I stopped out of a high beta long position in Biogen (BIIB) that fell on the back of the Senate’s failure to pass a health care bill.
And for good measure, I added a position in Goldman Sachs (GS) in the event that the Great Sector Rotation ensues without warning, which it eventually will.
After six months of hibernation, I think the banks are about to make a move.
A long in Goldman Sachs would be a nice hedge against any such rapid sector rotation.
As our profitable short position in the US Treasury bond market (TLT) is screaming at us, the bond market may have peaked for the year last week, and financials love rising rates.
Banks also passed their annual stress test with flying colors. They are now well capitalized enough to handle TWO 2008 type financial crisis.
This is the Federal Reserve’s Comprehensive Capital Analysis and Review, otherwise known as CCAR.
Apparently my friend, investment legend and reader, Warren Buffet, agrees with me.
He announced that his Berkshire Hathaway (BRKY) is exercising warrants obtained at the nadir of the financial crisis to buy a staggering 700 million shares of Bank of America (BAC).
They already have an eye-popping $12 billion paper profit.
Oh, if I only had his knowledge at my age!
I had a call spread for the IPath S&P 500 VIX Short Term Futures ETN (VXX) all lined up and ready to go. But it moved too fast for me to get a Trade Alert out.
Readers always complain when my alerts succeed so quickly that they can’t get in. At one point on Thursday, a massive short squeeze drove the (VXX) up 25%.
If there is a switch out of growth and into value it would create a big problem for index investors.
Technology now accounts for 25% of the SYP 500 (SPY), as our economy moves towards a future entirely based on technology.
Banks are only 6%. If the lead changes from tech to banks the net effect on the index could be negative.
By the way, the options prices at the Friday, June 30 close were exceptionally screwy.
No only was it a quarter end and a half end, the closing option prices were artificially marked in a major way.
Prices for call options on rising stocks fell, while put options for falling shares also declined in value. It made no sense.
Exacerbating the marks was a 100-point dump in the Dow Average on the last tick of the day, no doubt the result of index funds attempting to match their benchmarks as closely as possible.
The net effect was to cut our annual performance by 2%, all the result of window dressing.
No doubt this money will miraculously show up on our position sheet at the Monday morning opening.
Most serious players have taken the full week off, and only “B” teams are manning desks.
On Monday, July 3, we will see only a half day of trading, the stock market closing at 1:00 PM EST.
At 9:45 AM, the first report of the week is the PMI Manufacturing Index, a read on new orders for products manufactured in the US. Will the hard/soft data conundrum continue?
On Tuesday, July 4 the markets will be closed for Independence Day.
On Wednesday, July 5th, at 2:00 PM EST the big event of the week will be the Fed Open Market Committee Meeting minutes from the June 16 meeting. This is where we find out what they were really thinking.
At 10:30 AM EST the weekly EIA Petroleum Status Report is out, probably with more awful news. This could be the low of the week for oil traders.
Thursday, July 6, we learn the start of the trifecta of jobs report with the ADP Employment Report, a monthly read on private hiring at 400,000 US companies.
At 8:30 AM we learn the Weekly Jobless Claims. Last week’s number saw a slight tick up.
On Friday, July 7 at 10:00 AM EST we receive the June Nonfarm Payroll Report.
The last two months saw data that were soggy at best. Will the downtrend continue? With this one of the peak summer vacation weeks of the year, will anyone care?
Wrapping up the week at 1:00 PM is the Baker-Hughes Rig Count, which has been up for most of the last year, boding ill for oil prices. Last week saw a doubling of year earlier rig numbers, and over a year of rises.
As for me, I’ll be working out of Santa Barbara the coming week so I can bone up on my surfing skills after the market closes and watch the fireworks from the beach.
I’ll also visit the Ronald Reagan Presidential Library in nearby Simi Valley and see the ancient Boeing 707, the first ever produced, which I used to ride around as a member of the White House Press Corp during the early 1980’s.
Yes, the planes I used to ride are now museum pieces!
Good luck and good trading!
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