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Tales of a Technician: Rotation not Risk-Off

September 27, 2021

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Today might be one of the most textbook sessions I’ve ever seen illustrating sector rotation. Five sectors are in the red today: healthcare, technology, utilities, real estate, and consumer staples. Six sectors are in the green: energy, financials, basic materials, consumer staples, industrials, and communications.

Meanwhile, the S&P 500 is essentially unchanged for the session.

Consider this snapshot of my sector gridiron watchlist as of 3 PM EST.

Picture a teeter-totter with red sectors on one end and green sectors on the other. Because they are in perfect balance, the S&P 500 sits dead center at zero.

This is the bulls’ favorite type of correction. And it stands in stark contrast to a risk-off day. Were investors de-risking portfolios, I assure you wouldn’t see small-caps rising 1.80%. This, my friends, is a mere shuffling of the deck. Money fleeing tech stocks and health care is finding a home in the welcoming arms of energy, financials, and basic materials – cyclicals, in other words.

It should come as no surprise that this move is happening while interest rates are rising. As I wrote in last week’s Options Theory blog, energy and financials have historically performed best in rising rate environments. At the risk of jinxing today’s harmonious Intermarket movement – the price action is playing out perfectly.

If the small-cap and cyclical resurrection weren’t enough, reopening plays are getting in on the action. I featured the airline industry ETF (JETS) as this morning’s Chart of the Day. You can add cruise lines, retail, and automakers to the list of today’s biggest gainers as well.

Does this type of movement strike you as fearful? Is panic ruling the day? Or might it just be that investors are ringing the register in some of the big winners in tech and reallocating gains to other, more attractive areas?

I’m betting on the former. And, by the way, I suspect the tech weakness will be short-lived. While we may see some underperformance, I can’t really see tech continuing to sink while small caps soar. Days with as much divergence as we saw today are rare and unlikely to persist. If the newfound uptrends in cyclical stocks continue, I suspect it will eventually drag tech higher with it.

In sum, this is a win worth celebrating for those who held through the recent turmoil.

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