We're now into 5 days of gains for the Dow Jones Industrial Average. A near-term bottom is forming in health insurance, pharmaceuticals, financials, basic materials/commodities, telecommunications services, industrials & consumer cyclicals, with the strongest gains in high cashflow, dividend paying name in those sectors.
Tech continues to drag; however, the lifting effect of value stocks & undervalued sectors are lifting selected names in tech/growth.
In consumer defensive/retail, only select names are rallying (DG, DGTR, JWM, M) while select names have tumbled (WMT, TGT) depending on earnings reports.
A short to intermediate bull market in energy & related stocks, travel, and beverage stocks continues.
Financial reporters have been alternatively using the terms “rally” and “bear market rally” while analysts also claim that we're not near a market bottom yet.
My personal take on the market this week is that there are sectors and names in the market that have bottomed and are gaining/regaining value while tech/growth stocks are continuing to sink. My most bullish view is that while tech/growth stocks may see a short bear market rally in June, and then resume falling, some of the rest of the market may be starting to bottom, particularly the value stocks/sectors and the high cashflow companies within all sectors. While the rest of the market may resume falling after a brief early Summer rally, stocks that are not tech/growth will not fall into bear territory and may even rise out of correction territory.
Some facts & charts (in the below I'm using cash cow ETFs as a proxy for a high free cashflow, dividend-paying companies index)
- This is the 5th day of back to back gains for the Dow (DJIA)
- 8 stocks have been responsible for 60% of the market decline in 2022 (these would be tech/growth mega caps)
- Here's a chart over the past week of the gains in the Dow Jones Industrial Average (DJIA), health care (XLV), cash cow ETF (COWZ), global cash cows (GCOW) and energy (XLE) vs SPY (flat) & QQQ (losses)
- Here's the Finviz heatmap for the past week, showing strength in several sectors overall while other sectors are still a stock picker's game (some stocks up or stable, some stocks continuing to decline)
- This bout of this week is attributed to strong earnings reports today from some retailers after an initially depressing set of earnings reports from Walmart & Target sent markets spiraling down, the release of the Fed meeting minutes yesterday that confirmed no rate hikes > 1/2% are being considered, and after Biden suggested that tariffs may be lifted on consumer product imports
Some articles from this week covering which stocks are winning:
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Article about the so-called “tech rout”: The Tech Rout Isn’t Just Cyclical—It’s Well-Earned, and Overdue
My final takes:
I personally feel that it's unproductive for me to focus wholly on broad market indexes. Some part of the market are in a definite bear market and have more to fall. Some sectors of the market, like some industrial specialties, energy & commodities, are in a long term bull cycle. Other sectors are falling but finding footing. What is happening is that excess capital in some overvalued stocks are leaving those stocks/sectors and flowing into others. When that happens, that's called “sector rotation” if the money is leaving one sector and flowing into another, or “rotation from growth to value” as money leaves growth stocks that had been pumped up too much by low interest rates and flows into stocks that pay dividends and have good cashflow/fundamentals. If your eye is only on broad market indexes or one sector, you may be missing all the rotation-type action. For some people who have been able to avoid the overvalued stocks, this has not only not been a bear market, but not even a market in correction. Because of the footprint of the overvalued tech/growth/mega caps, the volatility of those stocks of course will drag down the entire market at times, but this is not necessarily a bad thing.
There are a lot of risks and downsides in the market environment today & none of this is advice that anyone who is not actively interested in following markets & stocks should invest at this time
Note: This post is not intended to advocate for a bull or bear market, but I feel it's helpful for investors to study both sides of a trade.
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