Market Rotation Saved The Market Rally, For Now

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Includes: DIA, IBB, IWM, QQQ, SPY, XBI, XME
by: BubbleBustInvesting

Summary

Market rotation from popular sectors to out of favor stocks is back.

It has helped Wall Street hold on to gains.

Ultra-low interest rates have made stocks an almost certain bet.

But a rift within the Fed could change that.

Market rotation out from winners to losers helped Wall Street keep the rally going this week. Last week's losers like iShares Nasdaq Biotechnology (NASDAQ:IBB), SPDR S&P Biotech ETF (NYSEARCA:XBI), and Valeant Pharmaceuticals were particularly strong early this week. Especially on Tuesday, when they helped Wall Street shake-off the negative sentiment from the Brussels terrorist attacks.

In the meantime, last week's winners like SPDR S&P Metals and Mining ETF (NYSEARCA:XME), and US Steel were weak, holding on to most of their gains.

Stock/ETF

5-day Performance

iShares Nasdaq Biotechnology

+2.68%

SPDR S&P Biotech ETF

+5.00

Valeant Pharmaceuticals

+5.04

SPDR S&P Metals and Mining ETF

-0.03

US Steel

-002

Click to enlarge

Source: Finance.yahoo.com as of 3/24/16

Market rotation returned on Wall Street early this year, as investors rotated funds from last year's winning sectors to last year's losing sectors; and from winning to losing stocks.

There're are a couple of good reasons for this: First is a host of statistics that indicate an improvement in the US economy like a strong February payroll report, pick up in February factory orders, and a positive Index of Leading Economic Indicators Report.

Second is a re-assurance from central bankers that the ultra-low interest rate policies will continue, even if that ends up pushing above inflation above central bank targets in some countries (e.g., the US).

Ultra-low interest rates serve as a "market put" that makes stocks look like a certain bet-better than the alternatives (e.g., CDs and money market funds).

Reflecting the shift out of favor Metals & Mining sector outperformed the biotechnology sector-see table. Likewise, out of favor stocks Chesapeake Energy and US Steel outperformed Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN).

Stock/ETF

3-month Performance

5-year Performance

iShares Nasdaq Biotechnology

-23.66%

+154.78%

SPDR S&P Biotech ETF

-26.91

+127.08

SPDR S&P Metals and Mining ETF

+32.44

-73.04

Click to enlarge

Source: Finance.yahoo.com 3/24/16

Company/ETF

3-month Performance

5-year Performance

Facebook

+0.49

+253.65%

Amazon

-16.02

+168.21

Google (Alphabet)

-2.98

+151.31

Chesapeake Energy

+8.72

-70.42

Click to enlarge

Source: Finance.yahoo.com 3/24/2016

Market rotation is a confirmation that the bull market for US stocks remains intact.

A rift within the Fed over the direction of interest rates that surfaced in the media recently could kill market rotation and the rally that it has been supporting.

That's why investors should be very careful in committing new money to the market.

Disclosure: I am/we are long X.

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.