Tech is down and Dow components are up. It’s a “flip-flop” from yesterday, where tech shares eked out a small gain as the broader market fell.
Reopening-sensitive companies took center stage this morning, picking up whey they left off on Monday. Cruise lines and airlines, in particular, saw some of the trading session’s biggest a.m. gains. Energy stocks bounced higher on rising oil prices, too.
Wall Street has long predicted a shift into these kinds of stocks. Bank of America’s most recent fund manager’s survey showed that professional investors favored energy and cyclical companies moving forward. Tech, survey respondents indicated, was going to become less popular.
And though value-oriented shares hinted at longer-term rallies over the last few months, a major rotation never truly arrived.
The “will they, won’t they” sentiment swapping has many stocks stuck in a tight trading range as a result. The indexes are also looking somewhat paralyzed due to an overabundance of buy/sell signals, provided in spades by monthly economic reports.
Tony Dwyer, Canaccord Genuity’s chief market strategist, sees the indecision as a reason to remain on the sidelines until the market identifies its next prevalent trends.
“We’re in this period where the Russell 1000 growth mega-cap stocks aren’t oversold anymore and the cyclical or economic recovery theme isn’t extreme overbought anymore,” Dwyer said.
“So, I don’t really see a near-term tactical edge until we see some sign of an extreme that just doesn’t exist right now.”
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Dwyer argues that reopening-sensitive stocks are losing steam as well.
“The other part of no man’s land is that economic recovery theme got so extreme that we actually even downgraded the financials [to neutral] last Friday,” he said.
“You actually have long-term interest rates come down because the markets start thinking the global recovery may not be as rapid,” said Dwyer. “The risk is not in our view right now higher interest rates and economic acceleration. That’s what we want.”
Central banks still seem keen on keeping rates suppressed. That should bode well for growth stocks (like those in the tech sector) while wounding banks, which want higher yields and a strong recovery – something Dwyer expects to eventually arrive.
“We still love the economic recovery theme. We have excess liquidity that is historic. You go into recessions and sustained bear markets when you have a need for money with limited access to it. The opposite is true today,” he said.
“We’ve never seen this level of global liquidity in the marketplace.”
The Fed’s playing “liquidity whack-a-mole,” smashing down rates as they rise. Wall Street expects rates to climb slowly while Western economies come roaring back.
But over the last few weeks, yields shot higher and faster than investors wanted. That led to a “tech wreck” from which the Nasdaq Composite is still trying to escape. Treasury yields have since fallen, though, and if they drop further, tech may finally break out.
Or, the sector will continue to “ping pong” between support and resistance, ultimately doing nothing more than frustrating traders.
A few months ago, we predicted that a consolidation phase could be coming for stocks. Is this the start of one? It certainly could be.
The indecision will end when one group of stocks – value or growth – stages a significant rally. Until then, though, bulls may want to prepare for a bumpy (and choppy) ride.