The Market Rotation Is Here

Investor sentiment last year felt like watching a tennis match. I was trying to keep my eye on the ball as it volleyed back and forth between fear and greed.

This year feels a lot different. There’s no clear overall sentiment. You can find evidence to support either a fear or greed narrative.

The S&P 500 and DJIA are flat year to date, while the Nasdaq is down 2.6%. Consumer spending remains split by income levels. Wealthier households are optimistic about spending. Lower income levels have tightened the purse strings.

The CNN Fear & Greed Index has read fear since February 12, but it’s a much more nuanced story when you look closer.

I like this index because it uses seven fear and greed indicators that measure different pieces of the market:

• Market Momentum: A comparison of the S&P 500 to its 125-day moving average

• Stock Price Strength: New 52-week highs vs lows on the NYSE

• Stock Price Breadth/McClellan Volume Summation Index: The volume of shares rising versus falling on the NYSE

• Put And Call Options: 5 -Day ratio between the two

• Market Volatility: CBOE Volatility Index

• Safe Haven Demand: Difference between Treasury bond and stock returns in past 20 trading days

• Junk Bond Demand: Spread between the yields of junk bonds vs. investment grade bonds

And right now, they don’t all agree that investors are acting fearful.

Looking Past the Big Three

Two of the seven indicators are flashing extreme greed—stock price strength and breadth—and both are looking at the NYSE.

When we talk about the state of the markets we often refer to the S&P 500, Nasdaq, and DJIA. These three indexes are specific subsets of the overall market. Here, we’re looking at an entire exchange of about 2,400 companies, including more than 500 international companies.

Currently, there are more NYSE companies hitting new 52-week highs than 52-week lows. And there are more shares moving up than down.

Meanwhile, the big three indices are all flat or down. It’s a sure sign a market correction/rotation is underway. Stocks that have been beaten down for years are seeing improvement. For many of them, it wouldn’t take that much to hit a new 52-week high.

Opportunities Are Coming and Going

Many of the stocks I see going up right now were previously hated by the market for no good reason, or for an exaggerated reason. This creates opportunities for shares you already own but can block new opportunities.

For example, we had been holding shares of Edison International (EIX) in the Yield Shark portfolio. Shares tanked last January as investors waited to see the financial implications of the Eaton wildfire. We were still collecting our income but sitting on a steep unrealized loss.

That changed last week when shares jumped to a new 52-week high. We were able to get out of our position for a slight gain plus our dividends and move that money to a better position. This was a good example of a stock beaten down due to overblown uncertainty.

If you have losses in your portfolio that you think are overreactions, watch share prices closely. As the rotation/correction progresses, you may get the opportunity to exit your shares at a minimal loss or even a gain.

That’s the positive side of a rotation. Here’s the downside. As share prices rise you will lose the chance to buy them at beaten down prices and lock in a higher yield.

So, if shares of a favorite company are moving up but still below your buy target, you should grab them now. But don’t chase any stocks right now.  

One last thing to watch for: the stocks creating the fear narrative.

A correction works in both directions—some stocks correct higher, some correct lower. This could hand you a buying opportunity. I haven’t found any quite yet, but I’m monitoring my watchlist. As prices fall, I’m waiting to see if any yields pop into a desirable range.

For more income, now and in the future,

Kelly Green