RISING RATES CONTRIBUTE TO ROTATIONS -- FINANCIAL SPDR HITS ANOTHER RECORD -- FAANG STOCKS ARE STILL LAGGING BEHIND -- SO IS THE TECHNOLOGY SECTOR -- S&P 500 VALUE ISHARES SHOW NEW LEADERSHIP -- S&P 400 MID CAP INDEX HITS NEW RECORD
FINANCIALS CONTINUE TO LEAD ... Financial stocks continue to build on their strong September gains. Chart 1 shows the Financial Sector SPDR (XLF) hitting a new record high again today. Rising interest rates are the main force driving money into banks, brokers, and insurers. The black line just above the price chart shows the XLF/SPX ratio turning up during September. The green line in the top box shows the 10-Year Treasury yield also rising during September. If you examine the two lines, you'll see that they generally rise and fall together. Right now, they're both rising together. The upturn in bond yields has also helped push small cap stocks into new record territory (and mid caps today). The upturn in bond yields is also contributing to a rotation into value stocks. Financials are the biggest part of the value group. A lot of the money moving into financials is coming out of big technology stocks. Rising rates also have something to do with that.
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Chart 1
AAPLE, AMAZON, AND GOOGLE WEIGH ON TECH SECTOR ... This headline is taken from my September 23 message, which explained why rising bond yields usually cause tech stocks to lag behind the rest of the market (and contribute to the rotation into financials). And they're still doing so. Chart 2 shows Apple (AAPL) still in corrective mode. The falling red line plots the APPLE/S&P 500 relative strength ratio, and shows how weak Apple has been relative to the broader market. Charts 3 and 4 show similar relative weakness in Amazon.com (AMZN) and Alphabet (GOOGL). Facebook (FB) and Netflix (NFLX) have held up a little better than the first three FAANG stocks. Charts 5 and 6, however, show relative weakness in those two stocks as well.
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Chart 2
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Chart 3
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Chart 4
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Chart 5
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Chart 6
TECHNOLOGY SECTOR CONTINUES TO UNDERPERFORM... With those big tech stocks losing ground over the last month, it's no surprise to see the technology sector underperforming the rest of the market. Chart 7 shows the ratio of the Technology Sector SPDR (XLK) divided by the S&P 500 losing ground since the start of September (when bond yields started to climb). Although the XLK gained +.8% during the month, it still trailed the S&P 500 gain of 2.2%. The PowerShares Nasdaq 100 QQQ ETF (which is dominated by large tech stocks) lost -0.3% over the same period and has yet to hit a new high. Those are relatively small losses. But they show that rotation is going on beneath the surface. That's not necessarily bad for the market. It just means that money is coming out of one place and moving into another. The move into financials and small caps is actually good for the market. Because they're the kind of stocks that usually do better in a stronger economy. That's also true of value stocks in general.
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Chart 7
S&P 500 VALUE ISHARES SHOW NEW LEADERSHIP... The subtle shift from big techs and into financials also helps explain the recent preference for value over growth stocks. Chart 8 shows the S&P 500 Value iShares (IVE) rising strongly into record territory. The IVE/SPX relative strength ratio (top of chart) has also been rising over the last month (while growth stocks have been lagging). That's not a surprise since financials are the biggest sector in the IVE (27%), while techs are 36% of the S&P 500 Growth iShares (IVW). There again, value stocks are more cyclical in nature and usually require a stronger economy (with higher interest rates) to prosper. Both value and growth ETFs are also in record territory which is another positive sign.
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Chart 8
MIDCAPS ALSO HIT NEW RECORD ... Another subtle rotation going on is recent investor preference for smaller stocks. Small cap indexes hit record highs last week. Chart 9 shows the S&P 400 Mid Cap Index (MID) hitting a record high today. The MID/SPX ratio (top of chart) shows midcaps rising faster than large caps over the last month. Smaller stocks are more closely tied to the U.S. economy which is starting to show signs of picking up strength. They're also getting a boost from rising rates and a bouncing dollar. Small and midsize stocks may also get more relief from the proposed tax overhaul since they generally pay higher taxes. Today's upside breakout in midcaps shows the market's march to new highs broadening out even further.
