The Market Leadership Change Has Begun
Owners of technology (XLK) and health care stocks (XLV) have certainly had a great year.
Except for the round of profit taking that did a quick hit and run in January, these two groups have been moving from strength to strength, punching through to multiyear highs.
That is, until last week.
Starting with the Ukraine induced plunge a week ago, these two leadership groups have started moving in a rather arthritic fashion, substantially underperforming the S&P 500 (SPY). It is all unfamiliar territory for these golden boys.
You also see this in the broader indexes, with NASDAQ starting to trail the main market for the first time in ages. This is why Mad Day Trader Jim Parker shot out Alerts to buy protective puts in the (QQQ) with a one week view.
Is the bull market over? Should you sell everything and immediately go into cash? Is it time to go hide under your bed?
I don?t think so.
All we are seeing is a long awaited leadership change in the market. Tech and health care will throttle back from their torrid pace. It doesn?t mean that these sectors are now to be given up for dead. You should wallpaper your spare bathroom with high tech share certificates (as I once did with my Japanese equity warrants after their crash). They just need a rest. This is why I skipped Apple (AAPL) in my latest round of ?RISK ON? Trade Alerts.
In the meantime, financial stocks (XLF) have moved to the fore to grab the baton after a two-month rest of their own. This is why I sent you Trade Alerts last week to buy Bank of America (BAC), Goldman Sachs (GS), and General Motors (GM).
A shift like this makes all the sense in the world. Bonds (TLT) were great performers in 2014 until a week ago, when they double topped on the charts at $109. That was the logic behind sending you my Trade Alert to sell short bonds.
When bonds fall, interest rates rise, some 20 basis points on the ten year Treasury bond in a mere five days. Who does well when rates rise? Banks, which can now charge more for their loans while the cost of funds, the deposit rates you earn, are still close to zero. That widens bank profit margins, increasing profits. The technical term for this, which you will hear about on TV, is the ?steepening of the yield curve.? Bottom line: buy bank stocks.
They could rise a lot. If Treasury yields back all the way up to 3.05% and the (TLT) revisits its $101 low, the bank shares could go on a real tear. Jim Parker?s medium term target for (BAC) is $23, up a robust 30% from here.
I already have written up a Trade Alert to pick up another bank, JP Morgan (JPM). But I will sit on it until I can catch a dip in the share price, even a piddling one.
And what about the autos? The message shouted out as loud and clear by the red-hot February nonfarm payroll print of 175,000 is that the economy is stronger than anyone thinks. This is an out there view, which I have been arguing vociferously since the summer.
The ferocious winter will no doubt cost retailers some clothing sales. No one is looking to buy a new winter coat in March. Year on year, Chicago has gone from six inches to an astounding seven feet of snow, and I?m told that everyone there is in an unspeakably foul mood, throwing empty bear cans at the TV set when the weather man appears.
This is not so for the auto industry. If buyers couldn?t find their local dealers under the snow, they will return during fairer climes with a check to take advantage of record low interest rates. At the end of the day, buying a car on dealer credit, or a lease, is a nice way to indirectly short the bond market, which we all know, is now in a new 30-year bear market.
Despite the endless blizzards that kept much of the east buried this year, the auto sales figures have held up surprisingly well. The industry is now running at a 15.7 million unit per year annualized rate, up from the 9 million unit trough seen in 2009.
It all sets up a nice upside surprise in carmaker profits after the spring thaw. You want to go out and purchase the entire sector, including General Motors (GM), Ford (F), and all of the subsidiary parts suppliers.
