Hot CPI Could Kill Interest Rates Hopes
Money flowed out of tech and into retail, banking, homebuilder and biotechnology on Tuesday.
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Weakness in technology stocks is the market headline on Tuesday. But the real story was rotation. The Technology Select Sector SPDR (XLK) and VanEck Semiconductor ETF (SMH) took some solid hits, but the VanEck Retail ETF (RTH), Financial Select Sector SPDR (XLF), SPDR S&P Homebuilders ETF (XHB), iShares Biotechnology ETF (IBB), and other non-tech sectors performed well.
The QQQ was down 1.1% and MAGS down 1.3%, but 57% of stocks were positive and the Russell 2000 was up 0.3%. That is what rotation looks like. Tech was thumped and rather than run for the exits, investors moved into other market areas.
The Best Sort of Corrective Action
This is the best sort of corrective action as it illustrates rationality about valuations rather than just fear or greed. Investors are making smart decisions and heading into areas of the market with lower risk rather than panic selling
The billion-dollar question is whether the CPI report, which is due on Wednesday morning, and the SpaceX IPO, which is due on Friday, will trigger further rotation or produce a broader move in either direction. CPI will affect all stocks, so there is a greater chance of correlated moves, while the SpaceX IPO will put pressure primarily on the technology sector, as rotation will occur within the group.
The good news is that this is action that favors stock pickers in the right sectors. The bears are focused on the poor action in the indices, but that is almost all a product of movement in technology. As I discussed on Tuesday morning, all of the largest capitalization stocks in the market are technology names so when they move the indices move.
The CPI Setup
Market players are already anticipating a hot CPI report on Wednesday. Even if the number is in line, it will still show that inflationary pressures are building. The market already priced some of that in with the ugly action this past Friday, but hopes of a dovish Fed are already thin, and a hot CPI report may kill that completely.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
