Investors Are Rotating into Defensive Positions as Market Conditions Deteriorate

We had rollover action this week as negative seasonality and economic concerns gained traction. The week was punctuated by a bounce on Wednesday when the Treasury announced expanded bond buybacks and Moderna (MRNA) surged, then it finished with a little relief action on Friday.

The Dow gained about 500 points, or 1%, with the S&P 500 and the Nasdaq each adding 0.4% on Friday, but all three still closed the week lower. Breadth was better at 62% positive, but it was rotation into defensive names rather than broad demand.

The Defensive Rotation Is Now the Story

Healthcare and financials carried the market Friday, with Merck (MRK) and Johnson & Johnson (JNJ) doing much of the work in the Dow. Technology was the laggard for the week and Nvidia (NVDA) finished lower. The tone was better on Friday but it didn’t do anything to fix the damage that occurred.

I wrote on Wednesday that rotation between growth groups is the market deciding what it wants to own, while rotation into defensives is the market deciding it wants less risk. That distinction is no longer theoretical. The reason the Dow closed up 500 points is that money went into the places where investors hide, and that is a different kind of green day than the ones we were getting a month ago.

Bessent’s bond buying did not help. The 10-year finished around 4.72%, higher than where it sat late Thursday, which means the buyback program has now failed to hold yields down for two consecutive sessions. Iran remains a mess and drove oil higher through the week.

PMI Complicates Things

One data point called into question the slowdown narrative. The S&P Global flash reading showed U.S. business activity growing at its fastest pace in more than four years.

That is not the number you would expect after a jobs report showing payrolls declining, a retail sales miss and Walmart (WMT) reporting its slowest sales growth in six years. It also is not helpful for anyone hoping the Fed backs off, because strong activity alongside inflation above 3% keeps the hawkish case alive.

I do not want to read too much into one survey. But it is a reminder that the picture is mixed rather than uniformly deteriorating, and that the market has been trading a slowdown story that the data has not fully confirmed.

Where the Bitcoin Money Is Coming From

Bitcoin surged this week, heading for a gain of roughly 23%, and technical traders piled into it. What makes that interesting is where the money is likely coming from. Bitcoin spent much of this year underperforming while speculative capital flowed into AI, and speculative capital is finite. It goes where the action is. If that flow is reversing during a poor seasonal stretch for equities, it tells you something about where the risk appetite is heading rather than whether it is disappearing.

That fits the pattern we have watched all year. Money moves rather than leaves. This time it may be moving out of the market entirely and into a different asset class, which would be a new development.

Game Plan

I am positioned for continued struggles but I expect it to be choppy rather than a straight decline. Cash stays high and I am being selective.

Nvidia reports Wednesday and that will likely trigger some volatility. It is the largest single catalyst between now and October, and it hits in the middle of the quiet stretch. Every question that has been driving this market gets tested by that report, from chip pricing to capital spending to whether the AI infrastructure buildout is still accelerating.

The setups I want are starting to develop but it is going to take a while before I will be putting much more new capital to work. September is historically the weakest month of the year and we are not there yet. There is no reward for rushing to throw capital at this market.

Have a great weekend. I’ll see you on Monday.

At the time of publication, DePorre had no positions in any securities mentioned.