Let's talk about the topic that seems to be on everyone's mind: The Great Rotation.
By that I mean out of growth and into value. I feel as though I am asked this question every single time we have a move such as we had last week.
It's as though folks forget that three weeks ago, we had a week where it was all big-cap tech and nothing else. Was the vaccine announcement a game changer? It probably helped. And no one seemed to notice that not only did semis underperform last week, the PHLX Semiconductor Sector "SOX" index was actually down almost 1% on the week. Notice that it is not down from Monday's pop, but down from the prior Friday. If that is not a subtle shift, what is?
But I look at the chart of the Russell 2000 fund (IWM) relative to the Nasdaq Invesco fund (QQQ) and I see a ratio that on Friday couldn't get over Monday's high. Also, Monday's move didn't even come close to the June high. Sure, it looks like a base, and it should be a base, but it's done this before.
And in cringe-worthy news, Barron's has decided to anoint the small caps as "King," with a cover story, "The Return of Small Stocks."
I realize a Barron's cover is not what it used to be (in terms of being contrary) because unlike decades ago, when the majority of market players spent their weekend reading Barron's, that is no longer the case. However, I would remind you that on Jan. 20 Barron's cover story was about the market melt up and why the Dow wouldn't stop at 30,000. Two months later, the Dow was under 20,000.
There are plenty of growth stocks that look like tops. But they don't break. Or they bend but snap right back. I liken those fake break downs to a child who runs away from home and goes to the neighbor's house instead of getting on a bus crosstown. If a whole troop of children -- growth stocks -- got on the crosstown bus -- meaning they broke down -- I'd say the shift is real. But for now, I think we remain in an either/or market.
Statistically, breadth remains relatively strong. The McClellan Summation Index is rising and breadth has made a new high. Short term, however, the market is overbought. My own Oscillator, which is based on the breadth of the market, is overbought. Breadth has been red only two days of the last 10. That makes it overbought.
Sentiment is a bit overdone up here, as well. The AAII bulls are the highest in nearly three years. The Investor Intelligence bulls were 59% last week; it is very likely they will get over 60% this week. The NAAIM Exposure Index is at 96%. And now we have the 10-day moving average of the equity put/call ratio getting low again.
Finally, there is the "Insider Ratio." For months I heard how Insiders were selling with great enthusiasm, but it never seemed to show up in this chart I monitor. Now it has. You can't line it up with the market, because it rarely lines up well. But a spike like this often means a correction is not that far away.
I want to reiterate that I think we're just looking at a pullback, something to shake the bullishness, something to get rid of the overbought reading. If the breadth indicators turn sour I would look for more than that.