The major indices are solidly higher this year and that seems to be making pundits nervous. The clamor is getting louder for a market correction. Maybe it’s the election cycle or maybe the summer heat, but whatever it is the news media are frustrated with the market exuberance. What often fails to be mentioned though is that we sort of already had a correction. The median stock is down this year, small cap stocks are also down, and consumer discretionary has been a laggard for months. Industrials broke out to new highs at the end of last year but have now been flat since March - as have financials. We’ve experienced a correction and now we are getting a rotation.
As discussed before, rotation is vital to a healthy bull market. And right now while sentiment is low, investors seem to be taking the guesswork out of it and simply pouring money back into the tech titans. Microsoft, Apple, Google, Nvidia, and Meta are all at or near all-time highs. While this bodes well for the bull market overall that might not be the case in the near-term. The Nasdaq, on a technical analysis basis, is nearing “extremely overbought” levels. It sounds scary, but in the past it hasn’t paid to bet against this signal. Extreme readings such as this are often followed by short-term weakness, but then continue their long-term uptrend. If we do see a near-term pullback in the indices and further sentiment deterioration, it will likely just be a continuation of the rotation process. This time out of tech and into other areas.
A potential winner of the next rotation are commodities. A few months ago, we saw cocoa scream higher, now orange juice is near highs, gold is hitting all-time highs, and copper is on the verge of a historic 13-year breakout. If commodities continue to show strength, the beneficiaries would likely be industrials, materials, and energy companies. A rotation out of the mega-cap leaders and into some of these smaller conglomerates may not be enough to drive the indices up at the same pace we have seen over the past year, but on the other hand last week we saw both Nvidia and Apple stumble and yet the S&P still closed higher for the third straight week, advancing 0.61%.
In a recent survey of investors, over 60% responded that they’re expecting a major market top sometime over the next three months. For those of us that have been through several market cycles, this is music to our ears. Seldom do markets top when people expect them to.