Why I Raised My Cash Levels as Rotation Favors Big Tech
The market had a good day on Iran news, but the action was uneven.
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Technology stocks did a good job of hanging on to gains created by the announcement of a deal with Iran but much of the market faded as the day progressed on Monday.
Small caps (IWM) hung on to a 0.4% gain but closed at the lows of the day. Breadth was only around 51% positive. On the other hand, the Nasdaq 100 (QQQ) jumped 2.9% and closed well. The Magnificent Seven (MAGS) also did well but the DJIA closed at its lows with a gain of around 1%.
The main reason for the mixed strength was that the moves in oil and bonds were relatively mild in view of the action. Oil (USO) was down 3.2% and bonds held steady. There is still concern that oil and interest rates will stay sticky to the upside. While progress with Iran is obviously a positive, a final deal will take time and the oil markets are unlikely to normalize for many months.
Why the Rotation Went Into Tech
There were some signs of the sell-the-news action that I have been anticipating, but it manifested as a rotation back into the leading technology names and out of everything else. The main reason that this occurs is that the big-cap technology stocks are the reflexive buy when investors want to add risk. The easiest move when a money manager wants more market exposure is to buy the Magnificent Seven, semiconductors and other big-cap names leveraged to AI. AI is still the market leader and the market leader is what you buy when you want added exposure.
The big question is whether the market can build on this strength in technology. The mood on Monday was upbeat and the focus was on celebrating the end of this tedious deal/no deal stuff with Iran. In the next couple of days, the focus is going to shift to the Federal Reserve meeting and also there will be more focus on the two big AI IPOs that are shaping up.
We still have about three weeks before second quarter earnings start to hit. The biggest catalyst in the near term will be economic and there is also going to be some summer slowdowns with the big July 4 celebration coming up.
Strategy
My strategy on Monday was to reduce some positions into strength. I raised my cash levels to over 40% and cut some of my larger positions. I’m not expecting a major downtrend to hit. I’m just increasing my flexibility so I can be aggressive with some new opportunities that may develop. I don’t feel like this is a good time to chase the momentum plays that have been running for so long.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
