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It’s a brand-new quarter, which means it’s time for the Generals to take a break and let the rank and file play catch up.
For the past several weeks, the performance of the major market indexes has been hiding weakness in the broader stock market. Strength in just a few stocks/sectors has kept the S&P within 2% of its all-time high.
Meanwhile, 78% of the S&P finished the third quarter trading below its 50-day moving average.
This has created a situation in which the daily technical indicators are in oversold territory – bordering on extremely oversold conditions – while the S&P and Nasdaq 100 are within spitting distance of new highs.
It has also forced institutional money managers – whose bonuses are tied to their relative performance to the S&P and QQQ – to jettison underperforming stocks from their portfolios and plow the money into the momentum-fueled stocks trading at premium valuations.
We’ve seen this movie before. So, we know it ultimately ends with money rotating out of “momentum” and back into “value.”
Think back to how the market was set up at the end of June… which happened to be the last end-of-quarter-window-dressing period. We had a similar “momentum vs. value” divergence, though not nearly as extreme as the current situation. Then, in July, money rotated out of the high-fliers and into the previously lagging stocks.
Momentum sectors – like semiconductors, memory, and AI datacenter stocks – got crushed. Many of them lost between 20% and 50% in just one month. Meanwhile, the lagging sectors like financials, energy, and food, enjoyed strong rallies.
October will likely be similar to July.
Of course, it’s easy to understand the attraction to owning the hottest stocks in the market. But paying historically high fundamental ratios for stocks trading historically far above their various moving averages usually leads to poor returns.
Think about it…
Near the end of June, you could have paid $2,200 per share to buy Sandisk (SNDK) – one of the hottest, momentum-fueled stocks of the year so far. Or, you could have bought it closer to $1,000 four weeks later. That’s the difference between owning SNDK at a profit or a loss today.
Traders who are thinking about chasing the momentum stocks higher as the fourth quarter gets underway should think again. We’ll likely have a much better chance to buy them in the weeks ahead.
Instead… rummage through the stock market’s bargain bin… which is loaded with financial, energy, retail, utilities, and other stocks.
I suspect they’ll be higher at the end of October than where they are today.
Best regards and good trading,
Jeff Clark
Editor, Market Minute