This market has been driven by rotation since it topped out on June 4th. We saw XLF (Financials), XLB (Materials), XLI (Industrials), XLE (Energy), and IGV (Software) blast higher from June into August while AI tech names and the Mag 7 faltered and chopped lower.
Then sometime in August and September, we saw money start to rotate back into Big Tech, AI names, and out of everything else. It has been an excruciating seven weeks to be in small caps or really anything outside of Big Tech and the top AI players. RSP, the equal-weight S&P 500 ETF, has had six bear weeks in a row and is trying for another one depending on Friday’s close. MAGS, the Magnificent 7 ETF, on the other hand, is just off all-time highs after a great nine weeks in a row.
MAGS Daily Chart
Everyone is talking about the terrible breadth right now, which is something to notice for sure. However, the bigger story seems to be that this remains a rotation-driven market. Until we get all or most of the markets aligned in a bull trend, the choppy nature of things will probably continue.
The question is this: Are we about to get everything lining up and money flowing back into the market strongly instead of just rotating around inside of the market, or are we going to see another rotation out of tech and into everything else?
The Rotation Trade: Betting on a Bounce
No one knows the answer to this, and I don’t pretend to. However, I do know that some of the charts I have been mentioning all week, like IWM, RSP, XLF, KRE, XLU, and DIA, look like they are trying to put in bottoms, and Thursday’s candles are even more proof of that.
Like I said on Wednesday, whether this is a dead cat bounce or not remains to be seen, but I have decided to put a bit of risk on the trade to see how far this bounce takes us.
I messaged the entire RLT Community at 8:00am on Thursday, October 1st, with this message: “IWM is getting really close to its 200-day SMA, a level that it found support and bounced at in March.” I have included the chart I sent hyperlinked to that sentence.
It seems to me that should IWM find support here, it could easily grind higher up into the double-top neckline at $287.77. If it is a double top, it will reject there and fail. Considering that is about $12 higher than the 200-day SMA, there is decent risk/reward on this rotation play.
IWM Daily Chart
Just from the volume alone, it seems like buyers are ready to come into these beaten-down sectors at these levels. Look at the volume coming into XLU after a massive waterfall of a sell-off. At least a mean reversion trade here makes sense.
XLU Daily Chart
Tech and My Plan Going Forward
While it looks like money wants to flow into those names, it also continues to flow into tech. QQQ and XLK are likely to make a new ATH on Friday or perhaps early next week. The only question we have then is whether big sellers use that push to new highs as exit liquidity, or if this is the start of the next larger leg higher.
Either way, my plan remains the same. As long as QQQ and SOXX hold above the 100-day SMA, I will stay bullish on tech. If we break below that 100-day SMA, I will shift to a defensive posture.
I will also use this push higher as an opportunity to raise some cash, just in case we get that historical drop within the first 60 days of a new rate hike regime.
QQQ Daily Chart
