Market review 23.09.03
Leadership: Back to Fuel
Hello everyone,
In last week’s post, we examined how bond yields and inflation have been a significant driving force in this market. A year ago, inflation began a big downtrend:
Bond yields responded by peaking in Oct and coming down. This helped tech to outperform much of this year. That’s where I have focused my trades.
However, we’ve seen some shifts the other way in the past month. Bond yields, inflation, and energy made breakouts. Industrials kept humming along. Meanwhile, many speculative tech stocks took a big hit in August after some stunning rallies. Bitcoin continues to look extremely weak.
I admit the past month has been confusing (ie. Is growth, value, bonds, or cash the best going forward?). But the picture is beginning to look clearer.
First, I want to examine this year’s leadership story more closely. We’ll then zoom out and look at the last several years. Finally, I end with how I’m positioned.
The rotation in 2020
I created a slideshow video showing how my ETF leadership board changed each month this year:
Industrials (XLI) and homebuilders (XHB) have remained steady leaders for much of this year, while regional banks (KRE) remained a steady laggard.
But there have been other sectors (namely tech and energy) with much more dynamic leadership:
In early January, energy was among the few leaders. Tech dominated the laggards, but some ETFs in this sector began exiting. KWEB was the first tech ETF to enter the leaders zone.
By February, many more tech ETFs (SMH, BOTZ) entered the leaders zone.
In March, energy ETFs entered the laggards (OIL, XOP, URNM). Tech dominated leadership.
This ranking continued until early August when we saw many tech ETFs drop out of the leaders zone while energy entered back in!
Here’s how things stand today:
Leadership still contains homebuilders and some tech ETFs, but it’s dominated now by energy, industrials, and steel.
Zooming Out Further
It’s easy to get lost in short-term rotations. But the recent move back into traditional sectors (energy, industrials) and away from tech is nothing new.
In many ways, 2020 was a big turning point. That’s the year when TLT peaked and began a big downtrend. It’s also when QQQ peaked relative to ETFs such as COWZ, PAVE, SLX, PXE, and others.
It’s not just a sector story.
An index of global leaders made a 10-year breakout earlier this year:
What’s very interesting is how this global index looks relative to QQQ. We see that it came out of a 2yr base last year, retested that base over the summer, and is now resuming higher:
Perhaps China and the Japanese Yen were masking some global strength in the VEU ETF.
This section shows that the leadership in place for much of the 2010s has changed as we entered the new decade (ie. From US tech and towards Global industrials, energy, and materials).