Is Rotation Into Lagging Stocks Bullish or Bearish?
Bears remain confident that weaker economic data is on the way. Here's my trading approach as things unfold.
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The stock market has recently experienced an unusually eventful period as it has dealt with tariffs, trade, a war in the Middle East, major rebalancing of the indexes, and a debate over the wisdom of Fed Chair Jerome Powell. Through this all, the bulls have remained resolute and deflected the cries of the bears who are convinced that an economic downfall is just a matter of time.
Although there were only minor indications in the indexes on Tuesday, there was an interesting shift in the price action. The growth stocks that have been leading the market, such as Nvidia NVDA and Microsoft MSFT, sold off, while money rotated into laggards such as UnitedHealth Group UNH, Amgen AMGN, and Sherwin-Williams SHW. The Russell 2000 IWM and DJIA led while the Nasdaq and S&P 500 lagged.
The bullish spin on this action is that the market is broadening and investors are trying to find cheaper stocks with less extended charts to buy. However, the bearish view is that there is growing recognition that the market has become too frothy and investors are looking for greater safety in stocks that appear less expensive.
The problem is that these lagging stocks are unlikely to replace leaders in the AI and technology sector. They are not likely to develop sustained momentum in the same way that the Magnificent Seven names have seen in recent months.
It was only one day of action and occured on the first day of a new quarter so it may just be the unwinding of some of the recent index adjustments and window dressing, but the tariff issue is approach an important deadline on July 9 and there will be critical economic data coming up as tariffs start to flow through the supply chain.
The bears have been wrongfully anticipating a market top for months, but they have remained confident that it is only a matter of time before there are more signs of economic slowing and sticky inflation. Even if they are wrong about the economy, technical conditions are very difficult here, and some sort of rest or consolidation is needed.
Increased caution is needed, but that doesn't mean rushing to dump stocks that have been performing well. Stay focused on the price action and see if the bears' arguments are starting to be appreciated a bit more. The goal is to protect recent gains and stay selective with new buying.
We have flat action in the early going Wednesday, but there is a very important June Jobs Report on Thursday morning that may keep folks cautious in front of the July 4 holiday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
