The key to producing superior returns in 2021 is to navigate the constant sector rotations that are taking place. That is not an easy task, however, as the shifts tend to occur abruptly, and the stocks that are outperforming can change dramatically.
On Monday, there was a return to some of the traditional leadership as technology, semiconductors, and Facebook drove the Nasdaq higher while the rest of the market struggled with negative breadth. This was not a sudden and dramatic shift, but many of the names that were leading last week struggled and encountered some profit-taking and consolidation.
A couple of factors helped to trigger the action. The first was that concerns about inflation and interest rates continued to decline. Bonds strengthened, which put some pressure on financials, and that helped to propel more interest in growth names.
The second news factor that is having some impact is that there some growing concern about the Delta variant of COVID-19. There is more news reporting on the issue, and there are already some places that are returning to more restrictive rules. This also tends to favor some of the big-cap growth names that were the safe havens in 2020 during the height of the COVID crisis.
Under the surface, though, there is still good stock-picking taking place, but it has been fairly narrow, and it is shifting fast. Monday's winners are not seeing great follow-through as the aggressive day traders move to new ideas and then dump them quickly as they move on.
We have the end of the quarter and the positive pre-holiday seasonality helping the tone of trading, and there is a good bounce in cryptocurrencies, which is also helping the speculative mood to some degree, but the main problem is that breadth is poor, and the best action is mostly in a few big-cap technology name and is quite narrow.
Overall, market conditions are fine, and there doesn't appear to be any major topping action. It is easy to confuse the rotational action with a market top, but the rolling corrective action is what is helping to keep the overall trend positive.
I'll be managing positions tightly and trying to keep up with the rotational action. Stock selection is much more challenging right now, but this is not a bearish market environment.