We’re back to sector rotation in the S&P 500 … what sectors are treating money the best right now … a forecast for the tech sector … crypto pops
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***Let’s get the bad news out of the way
From our Strategic Trader experts, John Jagerson and Wade Hansen:
The sudden rise (in the 10-Year Treasury yield) has caused havoc for many stocks in the technology, utilities, and real estate sectors because higher bond yields make those sectors less competitive.
As shares in these sectors have fallen, the S&P 500 has dropped back down to support at 4,350 (see below).
This drop has put the S&P 500 on the cusp of completing a head-and-shoulders bearish reversal pattern.
The index hasn’t completed the price pattern yet; it will need to close below the “neckline” of the pattern at 4,350 to confirm the pattern. But some traders are getting nervous nonetheless.
John and Wade wrote this analysis last Wednesday. Since then, the S&P did close beneath 4,350.
***In good news, John and Wade believe what we’re seeing isn’t so much a market collapse as it is a sector rotation
So, what sectors are on the receiving end of capital-flows?
The ones benefiting from the strengthening U.S. dollar.
Back to John and Wade:
Wall Street isn’t panicking, it’s simply starting to rotate money into the sectors that are poised to benefit from another knock-on effect from rising interest rates: a stronger U.S. dollar.
The U.S. dollar (USD) has been in a long-term downtrend since the coronavirus crisis kicked into full gear in March 2020.
The monetary and fiscal stimulus measures the United States put into place to deal with the pandemic pushed the value of the USD to multi-year lows.
However, the USD has been rebounding since June as the U.S. economy has been recovering and currency traders have been preparing for the Fed to tighten monetary policy.
The rebound accelerated last week after the Federal Open Market Committee (FOMC) meeting (see below).
John and Wade point out that the increase in the value of the dollar is bad for some sectors, though good for others.
The hardest hit sectors from a strengthening dollar are those that generate much of their revenues overseas. That’s because the conversion rate works against them.
Back to John and Wade to explain:
For example, if a company generates €1 million in profits in Europe when the EUR/USD exchange rate is 1.20, the company can claim $1.20 million in profits when it repatriates the money because €1 is equal to $1.20.
However, if a company generates that same €1 million in profits in Europe when the EUR/USD exchange rate is 1.05, the company can only claim $1.05 million in profits when it repatriates the money because €1 is only equal to $1.05.
As the USD gets stronger and stronger, companies that generate a larger percentage of their revenue overseas are going to feel the pinch. Conversely, companies that generate a smaller percentage of their revenue overseas are going to benefit.
Financials, Consumer Discretionary, and Industrials generally have less international revenue exposure. Utilities and Real Estate are in the same boat, but they are running into the headwind of higher bond yields (which are competition for their dividend yields).
Below, we see how the ten S&P 500 sectors performed from September 20 through September 29. It’s a helpful illustration of where the money is flowing into (and out of).
- Energy Select Sector SPDR Fund (XLE): 11.28%
- Financial Select Sector SPDR Fund (XLF): 4.10%
- Consumer Discretionary Select Sector SPDR Fund (XLY): 2.00%
- Materials Select Sector SPDR Fund (XLB): 1.35%
- Industrial Select Sector SPDR Fund (XLI): 1.13%
- Consumer Staples Select Sector SPDR Fund (XLP): -0.66%
- Technology Select Sector SPDR Fund (XLK): -0.67%
- Health Care Select Sector SPDR Fund (XLV): -1.95%
- Real Estate Select Sector SPDR Fund (XLRE): -2.51%
- Utilities Select Sector SPDR Fund (XLU): -3.11%
Here’s John and Wade’s bottom-line on what we’re seeing in the stock market today:
While the market is certainly correcting lower, there is still strong demand for U.S. equities. The money is simply shifting to different sectors at the moment.
***One sector feeling the pain of this rotation is technology
Tech-investors’ woes comes not as much from the strengthening dollar and exchange-rate headwinds as it does from soaring yields and what that does for tech stock valuations.
Our hypergrowth expert, Luke Lango, has been tracking this yield-spike. While it’s painful now, Luke believes there’s a limit to how long this will last.
From his Early Stage Investor Daily Notes:
Investors are worried that there are still a few more innings left in this current yield surge cycle.
We agree.
We believe the near-term outlook is for yields to go higher, or at the very least, for investors to be afraid that yields could go higher – and for this to create some near-term weakness in growth stocks, tech stocks, and our portfolios.
However, we do not see this phenomenon lasting for much more than a few weeks.
This current yield surge will end up being an overshoot – as has every yield surge of the past 40 years – and over the next 12+ months, yields will remain stuck below 2%.
As we explained, that’s a level that provides huge valuation tailwinds for the whole market.
If you’re a tech investor who’s weary of all this weakness and wondering what’s on the way, here’s Luke’s forecast:
When it comes to our stocks, we’re near-term cautious, medium-term bullish, and long-term super bullish.
As I write Monday afternoon, tech is under pressure once again with the Nasdaq down more than 2.5%. True to form, the reason behind the selloff is another jump in the 10-Year Treasury yield overnight.
Earlier in today’s session, it topped 1.5%. As I write, it’s fallen to 1.47%. Luke’s “near-term cautious” prediction is playing out.
But remember what Luke says is coming next. Hang in there.
***Another beleaguered sector that’s enjoying a recent show of strength
Last Friday, crypto prices soared.
Bitcoin and Ethereum led gains after Federal Reserve Chairman, Jay Powell, said he wasn’t thinking of a crypto ban here in the U.S.
From The Wall Street Journal:
Bitcoin and other cryptocurrencies jumped suddenly Friday, a day after Federal Reserve Chairman Jerome Powell said the U.S. didn’t have plans to ban cryptocurrencies.
Bitcoin rose 9% from its 5 p.m. ET value on Thursday to $47,352.65, its highest level in almost two weeks. Ether, the second-largest cryptocurrency by market value, gained 8.8% to $3,232.93 over the same period.
Crypto prices continued to rise Saturday, followed by profit-taking as Sunday rolled into this morning.
Even before Powell’s comments, Luke, who is also one of our crypto experts, was urging crypto investors to keep a level-head about recent weakness.
From last week’s issue of Ultimate Crypto:
Just like in 2013, 2017, and early 2021, this interim weakness is driven by near-term noise that will not dictate the long-term price trajectory – while the underlying fundamentals remain as strong as ever.
As to those “fundamentals,” they all relate back to adoption.
On that note, last week, Twitter added a feature enabling Twitter users to tip fellow Tweeters with bitcoin. Meanwhile, Affirm, which is an online lender that helped popularize the “buy now, pay later” business model, stepped into the crypto sector.
From CNBC:
In an investor presentation Tuesday, Affirm CEO Max Levchin said his company is working on a feature that will let consumers “buy and sell cryptocurrencies directly from their savings account.”
“It’s time for Affirm to support cryptocurrencies in a way that feels organic to us,” Levchin said, during the two-hour presentation. “We will soon leverage our savings accounts to seamlessly enable crypto ownership.”
Keep your eyes on adoption – not prices. And to get the latest sector analysis from Luke, as well as his top Ultimate Crypto altcoin picks, click here.
We’ll keep you updated on crypto, tech, and the broader section rotation over the coming weeks.
Have a good evening,
Jeff Remsburg
