The Dow Jones industrial average finished the day with a gain of more than 500 points, but it was an odd brew of action and, in several respects, was not healthy.
At the other end of the spectrum was the Nasdaq 100 exchange-traded fund (QQQ) , which is the home of the FAANG names and many other big-cap technology stocks. QQQ finished the day with a loss of 0.27%
This large divergence was primarily due to investors suddenly rotating into the sectors that have been lagging recently. The chief beneficiary was financial stocks. The SPDR Select Sector Financials ETF (XLF) gained 5.2% and the Oil Service ETF gained 5.59%, while the SPDR Select Sector Technology ETF (XLK) lost 0.10% and SPDR Selector Sector Biotechnology (XBI) lost 2.36% after a strong gap up at the open.
The logic here is not difficult to understand. Technology and biotechnology are extended and in need of some rest, so why not rotate into banks and oil services and hope to catch a bounce?
The rotational trade worked, but the big question is whether it will continue to work? There are really two issues here. Relative outperformance by banks is not such a great thing if they just aren't dropping as much as the rest of the market. Typical value plays tend to outperform in poor markets, because they hold up but don't make much progress. Strong bull markets are led by growth stocks and when they lag the broad market generally does not do well.
The action Tuesday caught quite a few folks leaning the wrong way, but the battle between value, growth, bears, bulls, new economy, and old economy is going to intensify in the days ahead. This rotational action is not likely to be very smooth at all.
Have a good evening. I'll see you tomorrow.