Indices Churn On Mix of Good and Bad Action
Financials broke down on the flat yield curve while biotech caught the speculative bid.
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After the Magnificent Seven broke out on Monday, the rotational action kicked in on Tuesday. A few mega caps led and the small caps lagged on Monday. On Tuesday, that action reversed early, with small caps and beaten-down groups catching a bid while the Magnificent Seven rested, before shifting again as the day progressed. The Magnificent Seven (MAGS) finished down 0.5%, the S&P 500 (SPY) was flat, the Nasdaq 100 (QQQ) added 0.8%, and small caps closed up 0.6%.
Breadth was strong early and faded to 54% positive by the close. New highs and lows finished at 76 to 160, so more than twice as many stocks made new lows as new highs, which is remarkable for a market with indices this close to highs. There are lots of cross currents out there.
Rotation Without Direction
This is churn, and it is the same thing I described at midday. Money is moving between groups fast, but it is not staying anywhere long enough to build a trend. The mega caps led Monday and gave a little back on Tuesday. The small caps led early and faded into the close. Nothing is acting like a real leader.
The clearest example was the split between two sectors. Financials broke down, with the Financial Select Sector SPDR (XLF) weak on a flat yield curve and the 10-year sitting at 5%. Banks make their money on the spread between short and long rates, and a flat yield curve squeezes that spread. The rate pressure that has driven much of the action showed up on Tuesday in the one sector most exposed to it. Meanwhile biotechnology was strong, with the SPDR Biotech ETF (XBI) up 2.3% as money rotated toward the speculative names.
That pairing between XBI and XLF is the day in miniature. Risk came out of the rate-sensitive banks and went into speculative biotech. It is a healthier flow than Monday’s mega cap only melt-up, and it helped the names I have been building, but it is rotation, not leadership. When the money is moving this fast between groups, it means nobody has enough conviction to commit.
Banks Are the Tell
The financials weakness is of some concern. Banks leading lower is a classic risk-off signal, because they are the plumbing of the economy and the market watches them for early trouble. On a day breadth improved and the small caps tried to lead, having the banks break down underneath is the kind of internal contradiction that keeps me cautious.
Tuesday’s move looks driven by the flat curve and the 5% 10-year rather than anything worse, and that is the likely explanation. But financials leading down while the index holds up always demands attention, and it is another reminder that the rate issue the market overcame last week has not actually gone anywhere.
Game Plan
I added to National Energy Services Reunited (NESR) and started a bottom-fish position in BridgeBio Pharma (BBIO) as I mentioned at midday, and the biotech strength today helped my overweight position in biotechs. Beyond those, I stayed selective and did not chase.
I’m staying cautious, although I did add a few things today. I’m still concerned that negative seasonality may raise its ugly head.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre was long NESR and BBIO.
