From love to hate in a matter of days. That's what has happened to technology stocks. The love affair investors had with this group since the October low now appears over.
Like an old sweatshirt you've grown to love, technology stocks had become such a comfortable place to be in this market. As the rally off the October low grew, so did the technology love affair. "Gotta own tech" was the cry. Just like you couldn't imagine wearing any other shirt on the weekend, you couldn't imagine owning anything but tech. So comfortable, so cozy; it just felt right.
But now tech is out and financials are in. Just like that. Each day I hear a new recommendation coming out to buy the banks or financials, much the same way everyone was jumping on the tech bandwagon a few short months ago.
The financials have been outperforming in a meaningful way. The chart depicting the
New York Finance Index
and its relationship to the
has been surging since early February. This is good news for the market. But the same way technology couldn't carry the entire market on its own (contrary to popular belief, it carried mostly tech stocks to new highs), the financials cannot do it on their own either. We need better participation from other groups for the market to rally well from here.
But group rotation seems to be the theme these days. Just as one sector gets overbought, the money moves on to another sector. It seems the market is having a difficult time rallying several groups at once. This action has helped the averages stay caught in a trading range for nearly two months now, with little conviction in either direction.
The market has been oversold for over a week now and has not managed to go anywhere. Well, actually it did go somewhere: up then down. The
Dow Jones Industrial Average
and the S&P 500 are beginning to act like rubber bands, expanding only so far before shrinking back in the other direction. In fact, in the DJIA, the trading range is tightening up with lower highs and higher lows.
Experience tells us that eventually this rubber band is broken. It has been my premise for the past 10 days that it would break to the upside. With the market still in oversold territory, it continues to have a chance to break out to the upside. However if it fails to do so while in an oversold condition, then it's likely that when we get overbought, we will make another try at the downside.
In the meantime, there is a small divergence between bonds and the
Dow Jones Utility Average
. Note how swings in the yield on the 30-year bond correlate to similar swings in the DJUA, a rate-sensitive average. Take a look at the relationship just since the October low. Point A saw a low in yields and a high in the utes. Point B was a short-term peak in yields and a short-term low in the utes. Twin peaks and troughs at Point C show the same relationship. Even the early February rise in rates took the utes to a new low (Point D). But now the relationship has diverged. With rates soaring to new heights yesterday, the utes failed to break to new lows (Point E).
Now perhaps I'm just biased to the upside, but it seems to me that the interest-rate-sensitive stocks are not confirming the rise in rates. And when I get a nonconfirmation or divergence, I pay attention.
As for individual stocks, the banks act well. While it is in my nature to begin worrying as soon as they get as much press as they have, I continue to believe that
in the DJIA will at least try their old highs.
can be added to that group as well.
, already at a new high, should continue to work its way higher.
In other DJIA names,
is still a good long-term base, and
hangs in there.
has taken off rather nicely; buy dips.
still look good to me.
is the best retailer.
base is still growing. And
looks good into this dip.
With the financial stocks outperforming and the market still in an oversold condition, I'm willing to have some patience with this market. My patience will wear thin if the improvement we've seen does not continue or if this improvement does not spread to other groups. As the rubber band gets stretched further and further, we can only hope it breaks to the upside while that window of opportunity is still open.
Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets Tuesdays and Fridays. At the time of publication, she was long Nike, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill.