When Might The Rotation Out Of Tech Stop?
1.) ROTATION – Bull markets always experience a rotation from one group leading to another. Right now, this market is in the midst of a rotation from tech. The tech sector tracker fund – XLK – has basically gone nowhere since the end of May. Same is true for the mega-cap tech Nasdaq 100. That feels like a long time. But is it? The question to ask is how long do rotations out of Tech tend to last? Deutsche Bank says since mid-2024 the average has been 67 days and the median about 59 days. On average the mega-cap growth and tech sector cohort sees a -16.6% drawdown with a median drop of -14.6%. So far, from their recent highs last week, QQQ is off just -4.2% and XLK is down -6.3%. That history, along with our volatility indicators suggest that tech may have a ways to go to finish their rotation. But that doesn't mean those "averages" have to repeat. It just gives us a framework of what could happen. If money has been coming out of tech, where is it going? Mostly energy (XLE) and healthcare (XLV). That said, given their recent moves, it would not be surprising to see a bit of a pullback in those sectors.
2.) GLOBAL MS – Global money supply is rising again after a short period of stabilization. This just shows that the currency purchasing power erosion we’ve all experienced will probably continue. This points to the "Bazooka" that's likely coming that I wrote about recently. You can read that here. The bottom line is that with massive persistnt deficits, persistent inflation is the norm. Governments printing money to cover the deficits is the cause. So what do we have now? Well, US CPI Inflation: Up to 3.7%, nearly 2x Fed's target. US PPI Inflation: Up to 6.3%, over 3x Fed's target. US Core PPI Inflation: Up to 5.0%, 2.5x Fed's target. US PCE Inflation: Last at 3.4%, 1.7x Fed's target. Brent crude up about +73% year to date. September officially marked the 67th-straight month with CPI inflation above the Fed's 2% target. Will the Fed let this stand and NOT raise rates this month? The bond market says maybe.
3.) RATES – Let’s try and expand on the question I ended with in point 2 above. Will the Fed raise this month? They don’t give “guidance” anymore, so we’re left to read the tea leaves that the market is giving us. The typical Fed “front-runner” has been the 2YR Treasury yield. While it is still bullish TREND, it has dropped below its shorter term trade level. That trend level is the rate of change (RoC) of price, volume and volatility. The 2YR yield would need to break 4.48% to move into a decidedly bearish – downward – trend. I’m not holding my breath for that. How about the Fed Funds options market. What are they saying? Currently the October rate hike expectations have faded. After reaching as high as 53% Wednesday following CPI, the probability of a hike has now dropped below 30% amid a strong rally in Treasuries and some dovish Fed pushback. So, the rates market (2YR Yield) is saying “maybe…sorta”. And the options market is saying “Nope…not likely”.
