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RoboStreet – February 25, 2021
Sector Rotation Spurs Market Volatility
There are a number of fluid dynamics simultaneously occurring that are raising the level of volatility within the market. The Atlanta Fed has raised their GDP forecast for the first quarter to 9.5% from 4.5%. WTI crude prices are trading above $63/bbl. Copper and industrial metals prices are trading at multi-year highs and there is a powerful rotation taking place where high-beta tech stocks are being sold in favor of deep value and cyclical sectors as preferred areas of opportunity.
The FAANG stocks have led the market coming into 2021, but plateaued early this year amid the rising inflation data, sparking selling pressure in these mega-cap stocks. Unless FAANG and other big cap techs like Microsoft Inc. (MSFT), Adobe Inc. (ADBE), and the big cap semiconductor stocks can participate, the market will struggle to move materially higher in the short-term.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
The reflationary trade is in full steam with Banks (XLF), Commodities (XLE, DBC, XME) and Transportation (IYT) leading the market. Growth stocks recovered Wednesday, but sold off again Thursday, again lagging the value stocks. Short-term, the SPY range remains between $370 and $395.The DXY remains weak. TLT continue to sell off as yield curve steepens.
The short-term correction has started and probably has one more week of retesting recent lows. The $388 level is the key support for the SPY short-term. Below that level, the key support is now at $370-$375 and I expect the SPY to retest these levels in the next week.
The bottoming process has started and the worse part of the sell-off is now behind us. Market will finish the bottoming process by end of February and will resume bullish momentum by middle of the March. I would be a buyer using any short-term corrections and use a dollar-cost averaging strategy to accumulate positions.
Driving the volatility is the bump in bond yields. The benchmark 10-yr has pushed up to 1.48%, which raised some caution flags for growth stock investors. Looking at the iShares 20+ Year Treasury Bond ETF (TLT), it’s clear there is some support right at the 1.50% – 1.60%.
On the flip side, rising rates are music to the bank sector, and as such, have provided a solid bid to the banks and insurance stocks on a broad basis. Shares of the Financial Select Sector SPDR Fund (XLF) are trading at a new all-time high after lagging for years, even when rates were materially higher.
When XLF cleared $31, it set in motion a new wave of buying as investors got a technical green light to up their weighting in financials. Considering that rates could gravitate higher for the year ahead, with the 10-year challenging 2.0% at some point, XLF should continue to add to recent gains in the weeks and months ahead.
Breaking down XLF, the top 10 holdings make up about 54% of total assets. It’s a blue-chip list of who’s who in the sector and great way to cast a net over the best-of-breed names in a single trade to ride the wave higher.
When we apply our proprietary Tradespoon AI platform to stocks and ETFs, we get a more precise read on what to expect from what the future might hold. For instance, our AI-driven Forecast Toolbox gives shares of JP Morgan Chase & Co (JPM) a Model Grade “B” rating with a Predicted Resistance price of $167.76 as a target. Although JPM stock is overbought on a short-term basis, our AI indicators will provide us a timely buy point with which to trade this best-in-class bank stock. I’d like to see the stock back and fill to the $140 level where I’ll be looking to alert our RoboInvestor members to get back into this name. We’ve traded JPM several times over the past three years, each time for nice profits.
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And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
*Please note: RoboStreet is part of your free subscription service. It is not included in any paid Tradespoon subscription service. Vlad Karpel only trades his own personal money in paid subscription services. If you are a paid subscriber, please review your Premium Member Picks, ActiveTrader, MonthlyTrader, or RoboInvestor recommendations. If you are interested in receiving Vlad’s personal picks, please click here.
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