Conditions Are Ripe for a Vicious Rotation. Here's What Could Trigger It
Many are missing the most important story of this market.
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While much of the business media is celebrating record highs for the Nasdaq, Nasdaq 100 QQQ, and Magnificent Seven MAGS, it is missing the far more important story of this market. For eleven straight trading sessions, there have been more declining stocks in the S&P 500 than increasing stocks, while strength in a few mega-cap stocks offsets the broader weakness and makes the indexes look very strong.
If every stock in the S&P 500 is given equal weight, the picture of the market looks quite different:
There has been a high level of disparity in the indexes for a couple of years now, with the Magnificent Seven covering up broader weakness, but the recent run has been very extreme and is hitting historical levels. Typically, when this occurs, the market corrects by rotational action out of the mega-cap names and into the rest of the market. The key issue is what could trigger such a rotation.
There are two events occurring in the next two weeks that are likely to be triggers for a vicious rotation.
The first is the Federal Reserve interest rate decision on Wednesday. While it is widely expected that the Fed will cut rates by a quarter point, the market will be intently focused on the likelihood of cuts in 2025. With inflationary pressures building, there is a growing belief that the Fed may not cut rates at all next year. If Fed Chair Jerome Powell sends a hawkish signal on Wednesday, that could trigger an exodus out of big-cap technology and other stocks that are not as expensive or as technically extended.
Another event that could help trigger rotational action is end-of-year pressures. A Santa Claus Rally is a well-known phenomenon at the end of the year, when investors make tax-planning moves and prepare for the start of a new year.
With the Magnificent Seven ripe for profit-taking and most of the market recently beaten down, conditions are very good for an exit from the Nasdaq 100 and into the Russell 2000 IWM, DJIA, and other areas that have severely underperformed in the last few weeks.
Market conditions are very unusual right now, and most of the business media is missing the big story. That creates the likelihood of a sudden shift, and the Fed is very likely to be the catalyst for it.
Keep an eye on the price action and watch for rotational action to take hold. If it does occur, it will happen very quickly and surprise many.
At the time of publication, Rev Shark had no positions in any securities mentioned.
