Risk appetite during a potential rotation: Stocks in Translation

The tech sector has dominated the stock market in the first half of 2024, and arguably, for many years on the stock market. Major players like Nvidia (NVDA) Meta (META), Microsoft (MSFT) continue to outperform and spill over into other sectors that require or utilize their tech. The gains in the market have narrowed in on this sector in recent months, but can that change?

Fundstrat global head of technical strategy Mark Newton joins Yahoo Finance Reporter Anchor Jared Blikre for Stocks in Translation to give insight into the domination of the tech sector, the idea of rotation in the market, and risk appetite in the Treasury Bond market.

For more expert insight and the latest market action, click here

This post was written by Nicholas Jacobino

Video Transcript

Welcome to stocks and translation, our essential conversation to get through the market, mayhem, the noisy numbers and the hyperbole to give you the information you need for your portfolio.

Today, I am joined as always by the people's producer, Sidney Fried and Mark Newton, who is the global head of tech uh technical strategy at fundstrat.

And we're gonna be talking about the market, a technician by nature.

We're gonna get in some other things as well.

But let's just get into the docket what we got planned today tech domination.

Uh We're not just here to point it out.

We're gonna be saying and uh figuring out exactly how to play these things and our phrase of the day is rotation.

Uh Sure it's fun to say, but do stocks and bonds, do they really rotate.

We're gonna break it down.

And this episode brought to you by the number 4.5.

That's the closest big magnetic level in the 10 year treasury reel.

That uh the bond market is saying and what is it saying about risk appetite?

So Sydney Mark, let's talk about the story of the week.

We've got uh markets a bit kind of boring lately.

We've got volatility dropping.

Uh We've got volumes dropping here.

We're in a holiday shortened week, but we're also at record highs where, what are we to make of this?

You know, the market continues to be incredibly resilient from my own point of view.

I mean, it's up about 14.5% but really nobody's happy.

And I think that's the interesting thing, you know, we're living in a time of, you know, obviously difficult political climate and people are worried about the wars overseas or potential of growth slowdown.

But yet none of that ever really seems to affect the stock market per se.

And so you have a tech led uh dominated market, which has done phenomenally well, but there still remain a ton of different companies and stocks that really have not even begun to participate in the rally yet and have really been on the sidelines.

So what, what happens when they participate, what's gonna, what's gonna draw them in?

Do you, do you have a time frame for this?

And what does it look like the time frame should be between now and next spring, summer?

I do think that we've already moved, you know, a large degree, um, probably 80% of what we'll do off the lows from at least last fall, we probably need to have a little bit more into the fall.

And I think we'll likely consolidate which ties in with a lot of the seasonality that happens most election years, you know, usually the market will peak in August September.

We have mild consolidation and then after the election, when there's a lot more clarity, usually, uh that's a very bullish time for stock indices.

So I think potentially, that's when our time when small caps finally, you know, begin to work.

Potentially.

I think, uh you know, it's interesting, we've seen a 50 basis point drop in yields, but, you know, small caps still really haven't done all that well and slowly but surely you're seeing evidence of financials and industrials and discretionary health care start to show a little bit of strength.

But it's still very much, you know, the market's been camouflaged by, by technology for all the right reasons.

These are companies that have changed our lives for the better and these stocks are still the ones that are working very, very well and the companies are making a lot of money.

Absolutely.

We're seeing this massive tech rally and you're saying it's gonna last a little longer, but we're gonna see other things break out hopefully small caps.

How does an investor pick their next sector?

Let's say I'm not gonna say stock, but we're so tech focused to our word of the day, we can do that.

That's fine.

So how do, how do we find locate these sectors that might get some attention here?

Well, the good news for all of us is that we can embrace what, you know, I've been doing for 30 years, which is technical analysis and, and looking at, looking at, you know, charts and, and having those make the decisions for us as opposed to, you know, hoping that something comes back when the charts don't really tell us the picture.

So you really wanna make use of relative charts and watch for evidence of sector rotation and start to see strengthening in certain sectors that would help to really put the odds in your favor towards thinking we're gonna see out performance.

But so even right now with tech still dominating, you know, a good rule of thumb is to diversify your portfolio, especially for people who are just kind of passively investing.

How does one diversify their portfolio when most of the gains are coming from tech?

Yeah.

Well, I guess the question is why would you want to diversify the portfolio if everything is being led by tech and it's working?

I mean, look, there's, there's two schools without there one is diversify your portfolio.

But in this case, that's gonna mean investing in things that aren't working.

Uh the other way to do it is to put everything into tech and watch it very carefully.

So put all your eggs in one basket and and watch it like a hawk.

Obviously, it doesn't make sense for for many people given their risk tolerance or time horizon.

So you know, yeah, you have to spread it amongst sectors such as, you know, one of my favorites is industrials I came into the year being positive in that group, it moved to new, you know, decade highs relative to the S and P. There are a lot of reasons why that sector was starting to work.

Well, you you mentioned something relative to the S and P. So I just want to kind of hone into that.

There are a couple of different methods of calculating relative strength, but real simply you could take a stock like Boeing and, and compare it to its industrial bar benchmark by uh just dividing B A over XL I.

And that gives you the relative strength of Boeing with respect to industrials.

Is that what you're talking about?

And then what are you measuring specifically?

Yeah, most times uh you know, you wanna try to always focus on those stocks that are showing very good relative strength uh compared to their own sector.

In this case, Boeing relative to the industrials, Boeing has not been a good performer relative to its benchmark.

But also once you find that list, you find ones that are trading within, you know, 10% of their all time highs or at least 52 week highs.

And you can start to sh you know, do some more relative analysis relative in this case, meaning take the stocks relative to the S and P and, and honestly, you want to take it versus the equated S and P or else you're just basically saying, how is my stock gonna do versus tech because the S and P is so tech focused.

Um So, uh you know, to, to your point earlier, a lot of different ways to measure relative strength that most investors think of RSI relative strength index, which largely just measures the strength of a, a stock against its own prior history, similar to throwing a baseball up and gradually seeing it drop.

And you know, there are ways to measure momentum.

In this case, you know, investors always want to see, are you involved with the right stock?

Is there another stock that might be better?

That's actually working better than your, your current, you know, the one on the horizon.

You might even see that, ok.

If you're taking a price like Boeing relative to the equal weighted S and P, it might not have broken out yet but or uh excuse me, price wise, but you may see the relative strength gaining.

And so that gives you a and you know, back to your point, you're looking for the next sector that's hot.

You can see these things kind of percolating uh in the sector level relative before they break out in price themselves.

I I would usually caution investors towards trying to uh you know, truly buy low, to sell high and think that you've captured the absolute low of any sort of sector that you're hoping is gonna be the next big thing because, you know, many times these laggard groups they take quite a bit in, in a while for them to start to really strengthen and, you know, any stock that's out or near 52 week lows is really gonna have a difficult time at clawing back.

So, I, I'm almost always of the school that you buy high, sell higher, uh, sell low or avoid low and cover lower versus thinking that um you know, you're gonna be able to buy something, it's at its lows just because of valuation purposes and you've ended up timing it correctly.

And that's where a lot of investors go wrong.

I mean, I think a few years ago, everybody said, well, China is incredibly cheap and China remains struggling and nobody knows the demand picture, but it's, it's having a difficult time and even small caps.

I mean, my own boss, Tom Lee has spoken at great length about how attractive small caps are from a valuation perspective.

But, you know, you need to utilize technical analysis, which is what I do.

So he and I work well as a team, I think in general, it helps to rip the blindfold off of really, you know, bringing to life or is this really the time that your, your fundamental thesis can work?

Are we seeing that actually in volume?

And is, is, is the chart starting to, to make sense or is it just a long term idea?

You know, that hopefully will work mark.

Can I ask you, you say buy high, sell higher?

So for something like NVIDIA today, and uh you don't necessarily need to say if you would buy it.

But if a stock is doing really well like NVIDIA and it's showed for the past year or two years, is it still a time to buy today or should you wait for it to come down a little bit?

You know, honestly, a lot of those questions depend on your own risk tolerance and your time frame.

I would just argue, you know, it's important to pay attention to people like William o'neill.

Uh you know, who created investors Business Daily.

He wrote a book called How To Make Money on Style, combination of fundamentals and technicals.

You know, typically he, he advised that some of his greatest investments for all time happened after a stock had moved to new all time high territory.

So he looked at those stocks that went up 123 400% or more.

And typically that happens as a stock, you know, you know, usually the stock has to show evidence of price strength before sometimes these larger moves happen.

So to answer your question, sometimes when the horse gets out of the barn, you have to go chase it because it might not come back.

Uh I own NVIDIA, I've been an investor in NVIDIA, but, but uh you know, some of my analysis suggests that in the months ahead, that it might be wise to consider diversifying.

I haven't seen that on the charts just yet.

But, but uh you know, I'm paying attention to several different things for now.

You know, technology in general still makes a lot of sense to me.

So potential rotation on the on the horizon, which leads us to our phrase of the day here, we talked about it before rotation.

And in finance, I'm gonna give you uh the dictionary definition.

And finance rotation refers to the practice of moving investments from one sector of the economy to the other, attempting to capitalize on the varying performance of sectors during different economic phases of the business cycle.

So what are, what's the business cycle?

We're talking about the boom bust cycle of the economy and a lot of it has to do with what consumers and builder businesses are doing when they see certain signs.

So are people retrenching?

Are they getting greedy?

Do they have dollar signs in their eyes?

So what does rotation mean to you?

Well, I think you've done a great job explaining it.

I obviously uh ro rotation in the stock market just refers to, you know, exiting a sector that is done poorly as it starts to gradually show more strength and and and it participates in the rally and then vice versa.

Oftentimes you see uh sectors that have done well that start to give way and and weaken So, you know, we all know that this year has not been the year of the consumer.

We've seen economic growth start to show ever so slight evidence of waning along the fringes.

And, uh, most of the consumer oriented groups have shown abysmal performance.

Be it either consumer discretionary with stocks like Nike, for example, or Starbucks.

And many of these are affected by the price of commodities that have hurt.

You know, Hershey's was affected by the chocolate boom.

And the same thing with Starbucks with coffee.

So, you know, i it's, it's, it's premature for me to say that the the consumer is just capped out.

But, but I think they're certainly you're seeing evidence in the stock market that, you know, the consumer area is not necessarily the best area to favor right now.

It's certainly out of favor.

Uh and the majority of defensive issues that are non A I related are also out of favor being consumer staples.

Uh The re sector utilities, utilities have strengthened, um a lot of that strength was just due to A I and Power Centers.

But really there is no evidence of any sort of defensive type push to the market, which for me gives me a sense of great optimism for the next 6 to 8 months as to why market should still go higher because people really aren't the pessimism uh is, is not there with, with the effect of how we're, we're witnessing that within the stock market and, and the actual uh you know, there has been no rotation and, and who's to say that there will be rotation?

That's a big but why, you know, why should we exit uh an a il boom in technology to think that, you know, all of a sudden small caps are gonna start to lead or any other group.

So we have to really witness that and have sufficient proof before we say, OK, this rotation is happening and yes, it might be wise to begin to diversify.

You can't say that based on three days of decline in NVIDIA where it loses 300 billion and then it goes for three days of declining NVIDIA that, that the world could be falling by that it could.

But the S and P is only down 1% within a few days.

So really nothing happened, right.

So, exactly.

Well, we need to take a short break here.

This episode being brought to you by the number of 4.5% in that is the level on the 10 year yield that it is surging towards today.

Just a few bits short.

And this gives us a chance to talk about the fed um Mark uh Mark, let me ask you long term, you're expecting lower yields on the tenure, I believe.

Um What do you make of the latest jump here?

Just short term noise or what's going on?

I do believe it's short term noise, I believe part of it was uh window dressing, um, cleaning up the balance sheets towards the end of quarter.

And, and also I think that there's um a potential read through that the debates last week caused some thinking that, uh uh you know, Trump might continue to gain ground on Biden and there might be potential tariffs in, in the future.

And so you have to think that that, uh you know, could cause an increase in inflation, obviously, less competition means that um you know, prices in general go up over time.

So bond yields, I think temporarily are responding to that.

But I I think my own view is that Powell's speech tomorrow with Lagarde should help to reinforce the dovishness, which I think is right in this economy with the economy has been weakening versus expectations now really for the last six months and you look at just the Citigroup index of, you know how that, how every day's economic data, that's right, economic data versus expectations and it's a new two year lows.

So really everything across the board, even this morning's data you missed yet again.

So, you know, it doesn't mean we're in crisis mode.

The economy is has been in pretty good shape for a few years, but you're definitely seeing evidence of uh you know, both disinflationary trends uh accelerating, which should be a good thing and also uh ever so slight evidence of the housing market starting to falter a bit.

And the labor market, we're seeing, you know, increasingly more layoffs, not mass unemployment, but in general, some, as I say, weakness on the fringe, it's caused rates to start to really roll over pretty sharply over the last few months.

My thinking is the 10 year gets down under 4% into the fall and that should drive a risk on rally for, you know, just given the recent correlations of how risk assets have performed, stocks have performed well.

Given the thinking not because the economy is weakening, but because it makes the market more closely aligned with when the feds gonna start to cut rates.

And any thinking the feds gonna cut rights in July, that might be seem far fetched.

But I, I definitely think we'll see some signs in September.

Uh Powell likely should reinforce that this week that we're the next big move is obviously to cut rates.

We're not gonna hike rates and, and, and that wasn't really taken into account on the last dot plot after the last fed meeting, I think he's gonna use this uh specifically as a time to address that.

Right.

And, and most traders are anticipating a September rate cut is one rate cut, a 25 basis point cut going to make a big difference to investors.

No, it certainly won't.

And honestly, you know, this touches on a larger point that, that, you know, the Fed's whole notion of, of being data dependent, you know, many of these rate cuts or rate hikes like we've seen in the last couple of years, you know, over what 550 basis points of rate hikes, you know, they take 12 to 18 months sometimes to filter through the economy.

They don't just, it's not just you, you, you cut rates once or you rate and all of a sudden that's gonna be a disastrous.

Uh, I just think the notion that uh rates are gonna start to fall on the front end uh generally is, you know, something that the market should embrace.

I mean, we've done our job.

Inflation's been cut in half.

Yes, it's still difficult.

Food and gas prices are, are incredibly high and, and that impacts a lot of people.

Um It certainly is going to be an election issue but I, I think that, um you know, car insurance can't continue to go up three or 4% a month and, and, and the shelter part of that is going to start to turn down if what, you know, my own boss, Tom Lee is saying is correct.

Mark.

I think I asked that also because it seems like we're so reactive to every data point that comes out or every prediction someone makes about what the jobs report is gonna look like when the fed is going to cut rates.

And so I think for me, it seems more of a mental or emotional thing for investors to react to this first rate cut.

Well, look, I think a lot of investors grew up thinking that uh fundamentals and, or fed policy largely drive the stock market.

And I would say that's absolutely not the case.

I think that a lot of that is cycles and sentiment that cause the larger turns.

Um It's certainly helpful to have uh you know, easy monetary policy, some signs of cutting rates.

Uh you know, the market seems to embrace, um you know, a lot of those, a lot of those things that it can be helpful.

But um yeah, it's an interesting time for sure.

Well, we'd love to talk about the fed, but we are gonna move on to uh our last segment of the day who wore it better.

And today we have two top level sectors battling out for bra bragging rights on consolidation.

And what that means is we're gonna be looking at large cap financials versus large cap in S uh that's gonna be XL F versus XL I both of their year to date charts.

They look very similar.

A peak in April followed by another peak in May.

Both are trading sidewise but who is setting up better for the next move?

Who is wearing the technical consolidation better?

Is it the industrials or the financials mark?

I'm in favor of industrial starting to lead out of this for, I guess a few important reasons.

One is that, you know, we are uh heading in the summertime, you see the transportation stocks, uh you know, should be starting to kick in a year, particularly with lower energy prices.

So that's gonna benefit some of the cruise liners, some of the airlines.

And I think that'll be helpful.

Transportation has been a sector that has lagged over the last year.

Um, but, you know, you look at, you know, in my own view, um just when you look at relative strength of how industrials, um not based on XL I per se, but maybe based on equal weighted industrials, how that looks versus the S and P. Uh it's still quite attractive.

Um Conversely, financials, if the economy is going to start to weaken and rates are gonna start to drop, that shouldn't be good for banks per se as much.

Um you know, being able to, uh you know, borrow, you know, borrow and lend it at different areas of the curve that obviously would favor rates being a little bit higher than lower for financial strength.

I'm also disappointed with the strength in, in regional banks and that really has never been been realized.

I mean, that that group has certainly been a big disappointment.

And so that's a big part of financials, not necessarily a big part of XL F per se, that's gonna be your JP Morgan's or your Berkshire Hathaway's and I have no technical issues with those, those stocks and those companies.

I think that they're very well positioned.

So I I'm not opposed to the large cap, you know, money center banks.

It's more, I have an issue with the regional banks that potentially could be tied to, to commercial real estate uh other areas that are suffering not only in the US, but also globally that uh just make financials, not as an attractive sector to me going forward versus industrials mark.

We're gonna switch gears here a little bit.

Yeah, big switch.

Uh you joined, you were at Diamondback Capital Management uh where there was an FBI raid.

This was what was it?

2012, 2010.

I definitely wasn't paying attention at that time.

Why don't you tell me a little bit about your experience then?

Ok.

So, well, at the time, you know, we had emerged from a recession back in the, the, the the banking um crisis, the bear market from 2007 to 2009.

And as we headed into 2010, the stock market had recovered, but the economy really had not and it really been uh you know, sort of uh not nearly gaining as much momentum.

So, you know, the the thinking was that all these banks are making big bonuses and there was real concern.

I think among the administration at the time as to why that was happening, they felt like the economy wasn't doing so well.

Um Largely, you know, naivete about just how hedge funds work when you run, you know, $8 billion and you, you, you have a fee structure of two and 20 you're, you're making a lot of money for a lot of the right reasons, you're making investors money.

Uh But people, it still wasn't a good optical image at the time for, I think it was a really main street for, for people to look and, and hear about uh you know, people making big bonuses and, and, and at a time when, when I think the main street was still largely struggling.

So, you know, a number of different hedge funds, um, based on the direction of Preet Bharara, uh actually were, were rated at the time, mine myself level, Global diamondback, which was formed from a few people used to work with S AC uh Steve Cohen's firm that now is 0.72.

So, uh, I was managing money at the time I'd been an analyst for a few years.

And, and, uh, yeah, it was an interesting time.

I, I think that, uh, you know, we all realized that it was a little bit of a witch hunt.

Of course, they ended up not being able to prove anything.

One of the cases was taken to the Supreme Court and overturned.

Um, so, uh, the firm had a bit of black eye just given the duty to his constituents and, and, uh, the firm had to be shut down, but largely, uh, you know, uh everybody was exonerated.

There was no no charges there, but it, it certainly changed my life.

Uh at the time going from, you know, I, I'd worked a stint on the floor as a, an options trader at the CBOE for a while and I worked at Morton Stanley.

And so to join Diamondback was one of the most prestigious largest hedge funds in the world.

And so uh formed based on a number of people from Steve Cohen's firm.

And so, you know, it, it uh as with anybody that's worked in the financial services business over the last 30 years, it's more of a two steps forward, one step back.

But yeah, to, to answer your question, I guess initially, uh it's incredibly scary when you see uh a raid happening and, and you're not sure why it's happening or, or, or what's going on and who's responsible and, and we got under a minute, any, any final words for investors here.

But anything, well, look, I would just say it's important to, to tune out the news to the extent that you're able, you know, technology is uh you know, is, is in a secular bull market.

It's very, very difficult to avoid these companies just because one thinks that they're overbought when they're all still continuing to change our lives at a very rapid pace.

So I think you have to embrace the A I boom, embrace the A I boom.

We're gonna leave it there Mark Noonan.

Really appreciate you stopping by here in City Fried as always, keep your dial T to Yahoo Finance.