Financial Stocks Benefit as Rotational Action Intensifies
The euphoric post-Iran move in technology stocks fizzled out fast on Tuesday, with the Nasdaq 100 ($QQQ) giving back 1.8% after gaining 3% the day before. The Financial Select Sector SPDR ETF ($XLF) jumped 1.5% as bonds rallied and interest rates dropped. Lower oil and gas prices combined with optimism about the Federal Reserve policy decision on Wednesday drove the rotation.
It is widely expected that new Fed Chair Kevin Warsh will keep rates steady but will announce some changes in the way the Fed operates. He is already on record saying he believes there should be fewer public comments by Fed members. Although no rate move is likely the market is hoping for some signs of dovishness.
Sell-the-News Action Arrived a Day Late
I have been writing about how I expected some sell-the-news action once an Iran deal was announced. That was delayed by one day, but it was in full force today with the leading technology and AI stocks under pressure. Market breadth deteriorated steadily during the day and at the close only 44% of stocks were in positive territory. Small caps went from green to red but held up better than the Nasdaq and Nasdaq 100.
There is nothing mysterious about this. The market has been rallying in anticipation of a settlement with Iran, the indices hit records on Monday, and the setup was a clean opportunity for profit-taking. The good news has been discounted, and there is no immediate catalyst for technology and AI at this point especially when the frenzy associated with the SpaceX ($SPCX) IPO cooling off.
The selling intensified because of where the money rotated. Capital came out of the AI infrastructure names and went into the interest-rate sensitive groups that benefit from a more dovish Fed. Lower oil prices and hope for less hawkish Fed language were the catalysts. Financials, regional banks and other rate-sensitive names are starting to pick up the bid that the AI group has been monopolizing.
Strategy
This sets up some increased volatility on the Fed policy decision and press conference on Wednesday. No hike is coming but the market does not yet have a feel for the posture of the new Fed chair. His comments about inflationary pressures will move the market.
As I mentioned on Monday and again on Tuesday, I have raised my cash levels to over 40% and am staying selective with any new buys. I am prepared to be patient and wait for some pullbacks and better chart conditions. Some folks experienced FOMO on the Iran news but chasing was the wrong move at the wrong time. The focus should be on playing strong defense and protecting gains. There are not many strong offensive opportunities right now.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
