The safest sectors in the market just ended their best day in weeks. All while tech stocks eyed new lows.
Wall Street is calling it a rotation.
I’m seeing something else, and it tells me exactly where to trade next…
Let’s follow this market momentum.
After looking under the hood, nine of the eleven S&P 500 sectors traded higher on Tuesday this week, while tech stocks fell apart.
If that sounds funky, you’re on the right track.
The S&P 500 is comprised mostly of tech stocks…
This kind of split doesn’t last for long. One side of the story is lying to us, and I’ve spent 25 years learning to identify which.
Position your account to take advantage of this momentum!
Two Different Markets
On Tuesday, July 28, the Dow Jones Industrial Average (NYSE: DIA) climbed for its third straight winning day.
- Sherwin-Williams led the Dow with a gain over 8% after a second quarter beat.
- Coca-Cola popped 5% on a top and bottom line beat plus a raise to full-year guidance.
- Consumer staples ran up 3.7%, healthcare 3%, materials 2.2%.
The S&P 500 opened the day higher as well…
But let’s look underneath the index’s hood.
- The VanEck Semiconductor ETF (NASDAQ: SMH) dropped more than 3% for a fourth straight losing session.
- Micron and AMD each fell more than 8%.
The semiconductor index has surrendered more than 20% this month alone, tech stocks are wavering, and the S&P 500 ETF Trust (NYSE: SPY) still sits roughly 10% off its highs.
Safety stocks are green, semiconductors are red, and yet, the SPY is still trading in a tight range near the highs.
This Story Doesn’t Hold Up
The financial press described Tuesday as a rotation out of semiconductors and into other parts of the market.
Think about what that would mean…
Nobody unwinds a multi-trillion-dollar position in chips and parks the proceeds in paint. The liquidity isn’t there.
If megacap tech money truly landed in staples and materials, those sectors would have gone completely vertical. But they didn’t … they slowly melted up at a boring pace.
Plus, tech-heavy indexes like the SPY would fall much further than they are now…
Money moved on Tuesday, no doubt. Just not the money the news wants us to believe.
In A Bear Market, They Rotate What Gets Sold
In a bull market, like the recent tech run, Wall Street rotates what it buys.
- Semiconductors.
- Memory stocks.
- Energy assets.
The bullish momentum travels around and the market grinds higher.
In a bear tape, the whole thing runs in reverse. The money rotates what it sells.
Put yourself in this hypothetical scenario…
You own a chip name that’s down 25% since June, and you own a consumer staple sitting a few percentage points off its all-time highs.
The chip name is the one you want. It’s beaten up, it’s familiar, it’s a former darling, and it carries bounce potential.
So which position do you liquidate to raise the cash?
Investors sell the staple. They sell the position that’s still green, because closing a winner doesn’t hurt and it funds the trade you actually want to make.
That’s the rotation of pain.
The defensive names aren’t shelter right now. They’re the ATM.
That’s how defensive stocks have avoided a vertical move while tech indexes avoid an all-out selloff.
We’re in no man’s land … for now.
Where The Ammunition Sits
Staples, healthcare, utilities, materials, REITs.
Those sectors rallied this week because portfolios need somewhere to sit while the AI trade unravels.
But the crowd showed up long before this recent price action. Back in February, Bank of America flagged four-week net flows into consumer staples, which hit an all-time high for a data set that runs all the way back to 2008.
That same stretch produced a rare decoupling, with staples climbing more than 1% on consecutive sessions while the tech sector fell at least 1%. The only prior instance came in 2000, right at the dot-com peak.
On July 22, analysts flagged ten consumer staples names carrying elevated RSI readings into second quarter earnings.
On Tuesday and Wednesday this week, those levels stretched even further…
Trade Small, Stay Alive
The volume is still thin in late July… the big money doesn’t come back until the fall surge.
Don’t be a hero in this market.
The name of the game is “stay alive”.
I’m looking for the beaten-down tech names to find a bid, and I’m looking for the defensive sectors to give back their gains as investors raise more cash.
Mark your levels and keep your size small enough that a choppy afternoon doesn’t shake your confidence.
Wait for these setups to come to you, because the alternative is gambling on random positions.
Once the volume returns to the market this fall, our lives will become much easier.
For now, trade with the market and get ready for the strength to return in a few weeks.
Stay Street Smart,
Jeff Zananiri
*Past performance does not indicate future results, Not typical.
