MONEY CONTINUES TO ROTATE OUT OF TECHNOLOGY AND INTO BANKS, RETAILERS, ENERGY AND TRANSPORTS -- FAANG STOCKS AND SEMICONDUCTORS WEIGH ON TECHNOLOGY SECTOR -- S&P 500 VALUE ISHARES ARE OUTPERFORMING GROWTH ISHARES
CHEAPER STOCKS ARE GAINING ... The rotation into cheaper undervalued stocks that started last week is continuing today on the back of the weekend passage of the tax reform package. The relative strength lines in Chart 1 show the past week's leaders to be banks (blue line), retailers (red line), transportation (green line), and energy stocks. All of them had been market laggards at the start of the November. They're now market leaders. All are expected to benefit from a stronger economy, higher interest rates, and lower taxes. Domestically-oriented small cap stocks are also showing relative strength for the same reasons. Technology stocks, which won't benefit from the tax package, have become market laggards over the past week. Money rotating out of the big FAANG stocks and semiconductors is moving into financials and other cheaper sectors mentioned above. The relative strength lines in Chart 2 show recent underperformance in Facebook, Amazon.com, Apple, Netflix, and Google. Semiconductor stocks are also being sold. On a broader level, the market is experiencing a rotation out of growth and into value stocks.
Chart 1
Chart 2
S&P 500 VALUE ETF IS OUTPERFORMING GROWTH ... The rising green line in Chart 3 plots a ratio of the S&P Value iShares (IVE) divided by the S&P 500. Financials are the biggest part of the IVE (28%). The falling red line in Chart 3 is a relative strength ratio of the S&P 500 Growth iShares (IVW) divided by the S&P 500. That shows relative weakness over the past week. Its biggest component is technology (37%). The so-called FAANG stocks make up a quarter (25%) of that ETF. It's another way to look at the rotation out of technology into financials, but on a broader level. The black line in Chart 4 is a ratio of the Value iShares (IVE) divided by the Growth iShares (IVW). It too is rising. We saw an earlier version of that rotation during June. An even bigger rotation took place after last November's election on hopes for a stronger economy with rising interest rates. The passage of the tax reform package appears to be reawakening those hopes.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
FEDEX AND UPS SURGE TO NEW HIGHS... Transportation stocks are having another strong day. Delivery stocks are one of the reasons why. Chart 5 shows FedEx (FDX) surging to a new record. Its relative strength ratio (top of chart) is doing the same. Chart 6 shows United Parcel Service (UPS) nearly as strong. No doubt that buying is based on the same optimism for the holiday shopping season that's driving retail stocks higher. Someone has to deliver all of those Christmas gifts.
(click to view a live version of this chart)
Chart 5
