The Rotation Beneath The Surface Is The Story, And This Week Could Decide The Next Few

Educational market commentary. Not investment advice. Not a recommendation. Not a solicitation.

By Michael Kramer, Mott Capital Management

The market pulled back a little again this week, but I wouldn’t call it a big pullback. The S&P 500 still hasn’t broken below its range, and we remain stuck in the same range we have been in since early June. A double top is possible, but it’s not confirmed yet. We would need to break below the mid-October low before we can talk about lower prices. The Nasdaq closed right on support, and a break below that level would open the door to a further decline.

What stands out is the rotation taking place beneath the surface. The S&P 500 is flat, while the equal-weight RSP has rebounded nicely over the last couple of weeks, mostly because health care and financials are doing better as rates have come down, while semis and technology are struggling. The pattern in the SPY-to-RSP ratio suggests equal weight should keep outperforming, and if that ratio breaks lower, I think semis and technology will keep underperforming, since those were the sectors that drove the separation in the first place.

Rates fell hard this week, and Thursday’s move looked exaggerated to me. It looked like a flight from parts of Europe to safety. The Italian-German 10-year spread widened considerably, and US high-yield spreads are moving right along with it, so credit spreads are starting to widen globally. I think that had a lot to do with Thursday.

This week brings the UK budget on Wednesday and a Bank of Japan meeting, both of which matter for global rates. I could see the US 10-year and 30-year pulling back a bit more, but not as far as everyone expects, and longer term I think rates are still trending higher. That supports the dollar, which looks positioned to go higher, and oil, where Brent has broken out of a meaningful consolidation, and I would be surprised if it stopped here. All of that argues for gold to keep struggling after closing just below 4,000.

Add heavy Treasury bill issuance between now and the end of November, and there are plenty of reasons to be cautious. The S&P 500 hasn’t done anything since June 2, and I think it has a challenging road to a new high. More likely we keep grinding, and the market starts to give back once earnings season passes and the dispersion trade unwinds.

-Mike

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Glossary by Claude

Double top: A chart pattern where price tests the same high twice and fails, confirmed only when the low between the two tests breaks.
RSP: The equal-weight S&P 500 ETF, where every stock counts the same regardless of size.
SPY-to-RSP ratio: The cap-weighted index divided by the equal-weight one; falling means the average stock is beating the index.
Italian-German 10-year spread: The yield gap between Italian and German government bonds, a gauge of credit stress in Europe.
High-yield spreads: The extra yield on junk bonds over Treasuries; wider means more perceived credit risk.
Trend-following flows: Buying or selling by systematic funds that react to price trends, which can amplify moves.
Dispersion trade: An options position that profits when individual stocks move independently of the index; it tends to unwind after earnings season.
Treasury bill issuance: Short-term government borrowing that drains cash from the financial system as it settles.

Disclaimer

This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

A Major Shift May Be Heading To Markets This Week

The Rotation Beneath The Surface Is The Story, And This Week Could Decide The Next Few

Glossary by Claude

Disclaimer