MorningWord 8/10/16: Rotate Your Tireds

by Dan August 10, 2016 9:36 am • FREE ACCESS

For the better part of 2015, it was somewhat concerning that a handful of growth stocks masked a total lack of progress in the broad market.

Any concern proved unwarranted as this group’s moderated gains gave way to rotations, some healthy (beaten up sectors like Energy & Materials) and some a little suspect (continued strength in Consumer Staples, Utilities, Telcos). This rotation came as the backdrop of abnormally low interest rates propelled the S&P 500 (SPX) and the Nasdaq (CCMP) to gains on the year and new all time highs.

It seems like there’s little out there that could derail the bull run. Meanwhile, headlines like these are back:

Spoiler Alert: the stocks listed are the ones you might expect given their weight in most major indices. But if the reflex action of past losers has run its course off of the 2016 bottom, it will take some real thoroughbreds to pull off the next leg higher in the bull run.

Snip20160810_7If that’s the case, we’d see a time period of big cap tech masking under performance of most other sectors, followed by those other sectors playing catch up and masking the under performance of the big cap tech prior leaders… and then followed by the baton passing once again back to the Apple’s and the Google’s.

So if that’s the case, what’s the trade with the market at all time highs and knowing that even as the market goes higher we still see rotations?…

If AAPL were to continue to rally (it’s up 19% since late June, but still 19% from its all time highs made in 2015) and GOOGL were to break out to new all time highs (made a new intra-day one yesterday) you are taking about $1.15 trillion in market capitalization, nearly 6% of the SPX and nearly 20% of the Nasdaq 100’s weight. That means we get a breakout in the Nasdaq.  But while rising tides lift all boats, I am hard pressed to see groups like U.S. Telcos (the beneficiaries of investor fears) continue to participate as AT&T (T) & Verizon (VZ) make up nearly a half a trillion in market cap, and trade like Facebook (FB), up 25% and 16% respectively on the year.  

So what that means is if you are jumping in here in stocks like AAPL, playing for a breakout, then it makes sense to pairs trade the Nasdaq with a short in the Consumer Staples etf (XLP) and the Utilities etf (XLU). To extend this thought process U.S. Treasuries may be signaling a potential top in the TLT (the etf that tracks 20 year bonds). I’d argue that with expectations for a rate increase still below 25% at the Fed’s Sept & Nov meetings, and below 50% for December, yields may not being going anywhere soon.


But the writing is on the wall. And that could be one of the main reasons why you would want to play for a breakout in the Nasdaq as a trade as investors consider what they are paying for real growth vs just yield and lean towards GARP (growth at a reasonable price) vs YAHP (yield at a high price).