Is rotation giving the market legs?

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.wsj.com/finance/stocks/a-stock-market-rotation-of-historic-proportions-is-taking-shape-da9b6546?mod=hp_lead_pos1

A Stock-Market Rotation of Historic Proportions Is Taking Shape

Few investors saw the shift coming, and many are puzzled by what is behind it

By

Karen Langley, The Wall Street Journal, Updated July 22, 2024

…
The Russell 2000 index of smaller stocks beat the S&P 500 over the seven days through Wednesday by the largest margin during a period of that length in data going back to 1986, according to Dow Jones Market Data. The Russell 1000 Value index, meanwhile, notched its biggest lead over its growth-stock counterpart since April 2001, after the dot-com bubble burst…

The small-cap index rose 1.7% this past week, extending its 2024 advance to 7.8%, while the S&P 500 dropped 2%, trimming its gains to 15%…

Together, the Magnificent Seven—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla—reported a 52% increase in profits for the first quarter of this year, compared with a decline of 8.7% by the remaining 493 companies in the S&P 500…

Russell 2000 companies, meanwhile, are expected to report a nearly 18% rise in second-quarter profits, snapping a five-quarter streak of year-over-year declines… [end quote]

The “Magnificent Seven” stocks accounted for well over half of the S&P 500 index’s return in the first half of 2024. Such narrow growth is risky and potentially unsustainable. It’s possible that broadening support could give the market legs.

Or not.

It takes more than a week or two to establish an important trend such as a market rotation from mega-cap to small stocks.

And the market already has legs. The question is whether the stocks carrying the SPX can continue to run.

Wendy

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Seven days is relevant? They must be running out of news. :imp:

The Captain

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“Seven days” is the news. Too bad the Disney narrative turned out to be an insult to lemmings. It would certainly be apt for Wall Street “analysts”.

Steve

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Seven days is not relevant in itself; however, it is the time since Powell testified on the Hill, which the market did (and still does) consider significant.

DB2

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I’ve been holding about 20% of my portfolio in the Vanguard Tax-Managed Small Cap Fund for the past 15 years, primarily because they promise to never make a capital gains distribution and pay a minimal dividend.

Modern Portfolio Theory suggests that small cap value stocks offer the best risk -reward, but the last 30 years has taught us that Large Cap Growth Stocks are where the money is made.

intercst

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It is the wrong 30 years to look at.

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It hasn’t done particularly well. But maybe over the next 5 or 10 years it’ll shine? I own some VBR and VBK in a tax deferred account, and they’ve been doing okay recently. And they appear to have an even lower [current] yield than VTMSX.

You can’t choose the 30 years that will be your prime investing years. It’s going to be age 35-40 to 65-70 either way you slice it.

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I have it in a taxable account, so I can’t move in and out of it without paying a lot of capital gains taxes.

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Pols do screw up markets! :-1:

The Captain

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Simple explanation: sector rotation has started because there’s too much hot money out there with no place to go. The Magnificent Seven are wildly overvalued by traditional metrics, the big money doesn’t want to jump in at the top and they’re flatlining or worse, now it’s time for the rest of the market to catch up.

But at the value/GDP Buffett criteria the entire market is almost at the nosebleed levels of 1999, and when the reckoning comes it will be ugly. There’s always a last gasp, and perhaps this is it.

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Or maybe now it’s time for the wildly overinflated bubble to deflate.

Wendy

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In my case it will be 60 to 90. But that’s just me.

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Mid-caps and small caps valuations are in normal ranges. I don’t try to time the market much, but back in November I shifted a bunch of money away from large caps and into small caps for this reason. We’ll see if that was smart or not.

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While the ‘quote’ is from Wendy… my question is to everyone.
Is anyone going to cash?
In past ‘bubbleous’ economic environments, several folks have said they were or had already begun to move to ‘cash or cash-like investments’.

In Feb/Mar 2020, I went to 50% cash. I MISSED much of the huge run-up in March/May - June/July. I moved back into stocks, but, still … timing the market is hard.

In Fall2021, the top of the market… I stayed in, and rode it down.
And now, I’ve ridden it back up.
Roller coaster.
Timing the market is hard.

So, is anyone going to cash?
:face_with_monocle:
ralph

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Not me. Yippee yay kai yay!

d fb

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No. But I am moving out of QQQ slowly, and into value and low-volatility ETFs slowly as well. Partly due to what the future might have short-term, but partly just de-risking in general.

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Maybe, but highly unlikely. That’s because of nature. As we grow older, we become more conservative and our investing mix changes. For some people it starts at 50, for some 60, and for some at 70. That’s because at a certain point, we need our investments to produce the money that we need to live on.

With any luck, when we are 90, in about 30 years from now, we will still be here discussing things, and we can revisit it.

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Negative. One thing the great mungofitch helped me understand is that a high market P/E or CAPE doesn’t necessarily imply a market crash, and in fact CAPE is not very predictive of the short term at all. Instead, a high CAPE implies lower future rates of return over the next 5-10 years.

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Probably this for me as well, but I own a large chunk of QLD (QQQx2) so I might simply rotate to the S&P or just QQQ. Still speeding forward, but I might not have the gas petal fully floored in the near future.

Hawkwin
Who will note that every time he got out of QLD (a hand full of times over the last 15 years), he eventually regretted it as he never got back in at a price lower than when he got out.

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I thought leveraged ETFs were unsuitable for long holding periods?