A Healthy Rotation Or A Market Top?

Includes: DIA, GLD, QQQ, SLV, SPY, TLT
by: BubbleBustInvesting

Anyone closely following today's market activity would probably have noticed an interesting pattern: A big jump in major equity indexes and a big decline in precious metals and U.S. Treasury bonds. Most notably, today's equity rally is concentrated among laggards like high technology stocks. Apple (NASDAQ:AAPL), for instance, is 2.11 percent up, Intel (NASDAQ:INTC) close to 3 percent, Cisco (NASDAQ:CSCO) 2.70 percent, and Qualcomm (NASDAQ:QCOM) 1.82 percent. In the meantime, recent market leaders like homebuilders have been heading south. Lennar (NYSE:LEN), for instance is down close to 1 percent, while Hovnanian (NYSE:HOV) is down close to 3 percent.

This pattern isn't new. It is called rotation. Money comes out from leaders and goes to laggards. What does it mean for investors?

Major Precious Metals ETFs / Stocks

Major Equity Indexes on Wednesday


1-day Performance (%)



PowerShares QQQ Trust (NASDAQ:QQQ)


SPDR Dow Jones Industrial Average (NYSEARCA:DIA)


Major Commodity ETFs


1-day Performance (%)



iShares Silver Trust (NYSEARCA:SLV)


iShares Barclays T-Bond (NYSEARCA:TLT)


There are two types of rotation: A healthy rotation whereby capital is moving in and out of different asset categories and stocks until returns are equalized across different investments; and a non-healthy rotation whereby there is no more liquidity to chase different assets. Money must come out from the one sector to pay for the purchase of assets in other sectors. That's usually a signal of market top. What is the case in today's market activity?

I would argue for the first scenario, as financial markets are flooded with three money tsunamis: The Fed tsunami, the ECB tsunami, and the yen tsunami; and there are no signs that the tsunami is ebbing anytime soon.

Disclosure: I am long HOV, LEN, QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.