Sector Rotation Accelerates as Energy Gains and Tech Stocks Lose Momentum

Well, let's get to the big story.

Breakdown on this Friday morning.

We are looking at US stock futures in negative territory.

This comes a day after the S&P 500 tumbled 1.7% on Thursday, marking its worst day since January, and puts the index on track for its fifth straight week of losses.

Now the S&P 500 recently broke below its 200.

Moving average.

Meanwhile, the Nasdaq fell 2.4% yesterday, closing in a correction at least 10% below its recent high.

Now cross asset volatility is spiking.

We're looking at crude oil prices surging on geopolitical tensions while gold is breaking support and the 10-year Treasury yield continues to push higher.

And as high beta tech loses steam, defensive.

As well as energy are taking the lead.

Joining us on this Friday morning to weigh in Katie Stockton, founder & Managing Partner at Fairlead Strategies.

Good morning, Katie.

Thank you so much for joining us while we are looking at the major stock averages this morning in negative territory.

So what are the indicators telling you when it comes to your short term outlook.

Well, as you can imagine from your introduction there, negative momentum is sort of what we're dealing with right now across time frames too.

So we have negative momentum indicators on a short-term basis that's referencing daily charts.

We have it also on an intermediate term basis, and that means that this is not just a pullback, of course it's become more of a correction.

Which means it's more significant in terms of the percentage downside, but also duration, and I think that's what we're all struggling with to some degree is that this is a pretty persistent down move that we've seen now from the major indices, and unfortunately we don't have indications yet that we have any counter trend signals or oversold upturns to give us much hope that this is done, you know, in terms of going down near term.

And Katie, while I have you here and while we are looking at the markets, I do want to get your take on sector rotation.

So given the massive weight of tech as well as semis in recent years, do you view this rotation into energy as well as former laggards as a temporary defensive hiding spot, or would you say that this is the beginning of a longer term change when it comes to leadership?

There are definitely a lot of factors at work there in terms of obviously the energy sector, momentum and relative performance.

That's actually something we last saw in 2022, which of course was a bear market cycle for the major indices, so it doesn't give one much peace of mind to see the energy sector so strong.

But it is strong and it is a place where investors can find momentum and outperformance.

We saw the shift in crude oil even before the Middle East conflict.

We saw the monthly MACD indicator, which is a long-term momentum gauge gauge, shift to the upside behind crude oil, and of course subsequently we saw breakouts in a lot of energy stocks.

You can even extend the strength to alternative energy sources, solar and wind, so it's a pretty interesting and very specific sort of rationale behind the energy sector relative strength, whereas the other sectors that have emerged and been sources of relative outperformance either they lean more defensive or they tend to be somewhat commodity.

Related in the material sector pushing the, you know, precious metals complex aside right now, more of the agricultural commodities and things of that nature.

So we have some specific spots of relative performance, and part of that does seem to be defensive positioning.

And then also there is some impact from rising yields on certain sectors as well.

And Katie, I do want to zoom in on energy prices.

We continue to monitor both WTI and rent prices, and this morning both contracts are higher by at least 2%.

And as you mentioned, WTI has sharply reversed.

Long term down trend, but with your monthly indicators flashing a buy signal for the first time since late 2020, how high do you see this rally running and how should investors actually be hedging against the resulting volatility?

It has been sort of a 14 1 negative correlation between crude oil and the S&P 500, but that won't likely always be the case.

Now, of course, it's very sort of acute, that relationship for obvious reasons.

You know, the resistance for WTI crude oil prices is roughly $102 per barrel, and above that, then we get back to that high around $130 per barrel.

Those levels don't act as magnets for price, but they are hurdles on the charts.

I think what it's more important is that we're expecting to see a series of higher lows, higher highs as the coming months progress, and that's obviously a shift from what we had previously, which was lower lows and lower highs for many years really from the price of crude oil.

So I do think it is a pretty major cyclical shift that we've seen.

And of course the only guarantee right now I think with energy prices is short term volatility.

So I think it's a pretty difficult area if you're trying to trade those short term swings.

If anything right now it looks like we're we're in store for some consolidation, but it is, you know, pretty tricky to navigate the short term volatility.

And speaking of which, we're all monitoring the global bond market and right now we are looking at the US 10 year Treasury yield hovering right around the 4.48% level.

So moving forward, what levels are you actually watching and how much pressure will this put on the S&P 500's short term outlook?

Well, with tenure yields, we do have a breakout on the chart.

It's a breakout above a previous high and then also some resistance that we were watching right around 4.33%.

That breakout does suggest that we'll see the trend towards higher yields over the past few weeks continue over the coming weeks, but if you take a step back farther back, you'll see that yields are in a long-term trading range, so the bias beyond this intermediate trim up move is more neutral once you get into the secondary resistance, which is around 4375%.

For the 10 years, so and obviously that impacts some areas of the market more than others, but it is a trend that's asserted itself in a way that we really haven't seen over the past year or so that the trends have been kind of mishmash as a reflection, I think, of that longer term range.

So now we have this more asserted directional bias and indeed it does make certain areas of the market less attractive.

Well, Katie, we will have to leave it there for today.

So thank you so much for joining us on this Friday morning.

And as always, thank you so much for sharing all of your insights.

Thank you.