Rotations seem like tremendous mysteries when they occur. They seem so oblique, hidden, even inexplicable.
And then you look back and realize "what the heck was I doing still buying the industrial stocks at the top," or "why didn't I switch back to companies that have super growth no matter what." How did that rotation fool me!
Yes, they are that maddening. They can really sneak up on you. For example, go take a look at the last two months of charts for the stocks of Snowflake (SNOW) or DocuSign (DOCU) or CrowdStrike (CRWD) . Examine those of Square (SQ) , Tesla (TSLA) and PayPal (PYPL) . Take a hard look at Zscaler (Z) . You know what you see? You will see a whole bunch of patterns that look almost exactly the same. You will see stocks that had been in hideous decline and that decline ended right around May 12 of this year. Since then these stocks have been on an almost non-stop run-up. It's been torrid and, strangely, it's finally being talked about and noticed right now.
What happened that day to make things turn so hard? Was it something pandemic related? Pre-opening, post-opening? Some wayward earnings number? Presidential proclamation? Covid variant?
Nope.
What happened that day was we got the hottest consumer price index number since 2008, a bona fide barn burner of 4.2% that signaled things had really gotten out of control for those who had been hoping that Fed Chair Jay Powell would be on thick ice with his projections.
Thinnest ice, thinnest ice indeed, with one number, used car and truck prices up so much -- worst since 1953 when the record first started being kept -- that they were responsible for one-third of the increase.
Yes, that May 12 we got a number that signalled to the big institutions who group-think these issues and they collectively decided that Jay Powell was wrong and that inflation was now officially as out of control as the Mann Gulch Montana fire from back in '49. The big money decided to vote against Powell that day and they voted against him by deciding that he would have to fold and they wanted out of the cyclicals and into the stocks that do well when the economy slows and they wanted to make that switch well before others figured out that they were being consumed by the conflagration.
I know I didn't see it coming. I thought the big jump in the expensive cybersecurity stocks could be easily explained by the Colonial Pipeline fiasco. I never dreamed it was because the big trigger pullers had fallen in love with expensive secular growers again.
The initial inch-up in Zoom (ZM) and DocuSign? I wrote them off as collateral buying from the Delta variant. Maybe we were going back inside. Things did seem pretty dire if you go back to read about those days.
Oh, I had an answer for every one of those bottoms that day because I didn't want to believe that Powell was wrong. I still don't think he will be but I was unable to project what the crowd would think and for that, all I can say is, I should have known better. The crowd is "the house" so to speak when you go to gamble and the house always wins. The rotation began that day because -- rightly or wrongly -- that was the recognition that Powell would have to crater things, cause the fabled crash landing, because he had waited too long to put on the brakes.
It is sobering to look back at that moment because if you read the accompanying stories you would have seen nothing but "insights" about value versus growth and how much value was loved. Of course value was code for cyclicals and while the peaks there have been ragged the signs were all there to be had right in the midst of heated cyclical love.
Before you curse yourself as someone who can never get it right let's think bigger picture. If the consumer price index spike triggered the rotation then perhaps the next one, one that might see used cars and grains decline, can reverse it. That's not my point, though. My point is that the market is a humbling animal. I never heard a soul say that the CPI would cause this rotation.
Yet that's exactly what happened.
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