Realism and Market Rotation

March 17, 2016

Mish's Daily

By Mish Schneider

A Not So Still Life: Rocks in a Stream

mdaily20160317

On my desk I found this photograph of an oil painting by a local artist friend and Realist painter named William Shepherd.

Note how fresh, running stream water polishes stones while the ones that lay in the sun quickly dry out.

Now think of the market. Stones polished by water are beautiful to see. However, unless you go through the multiple steps to hand polish or buy a rock tumbling machine that permanently polishes stones, like in the painting, the water effect is temporary.

The market contains both polished stones and those dried by the sun. Water levels change which means that stones submerged can rise to the top and thus dry out, while those on top can submerge and begin to glisten. In market terms we call that Rotation.

What group and sector rotation should we be looking for?

Beginning in 2010 up until late 2015, Biotechnology traded higher and higher. Speculators couldn’t get enough of that group. >From the end of 2015 and now into 2016, Biotechnology has fallen well out of favor.

Last year, FANG was all the rage. Facebook, Amazon, Netflix and Google well outperformed while small caps, real estate and transportation stocks lagged.

Commodities had global economies super concerned about deflation since they couldn’t catch any fire. In 2016, gold and gold miners have well outpaced equities. Sugar is trading on a 12-month high and many other soft commodities continue to base out.

Oil, in a free fall since July 2014, looks like it has established a bottom at $30 a barrel.

So far this year we have seen money flow out of FANG and Biotechnology. Transportation (IYT) ignited this year leading the charge, with Real Estate running to new 2016 highs.

Presently, many Emerging Markets are benefitting from a weaker dollar and better commodity prices (especially oil). Russia, at the beginning of 2016, nearly matched its all-time lows set in 2008. Now RSX is trading close to a 50-week breakout.

What is the next Rotation?

In equities, I have talked a lot about solar energy and 3-D printing. That rotation has gone from infancy to toddler status. We can hardly say that those groups have reached maturity.

If the market turns over, my educated guess is that NASDAQ and FANG stocks are the best places to sell short. Financials, particularly big banks, as well as many big Pharma stocks should also feel the pressure.

If global economies improve further, expect more demand in commodities. From there, if any natural forces wreak havoc such as drought, flooding etc., soft commodities could soar out of control.

‘We look into the depths of illusion searching for a truth through open eyes.”-Brandon Hanson

S&P 500 (SPY) 200 key support to hold, 202 pivotal and if this closes the week out below 204, I’d be cautious.

Russell 2000 (IWM) 105 support, 107 pivotal and over 109 much better position

Dow (DIA) Filled gap with resistance at 175 and bit overbought

Nasdaq (QQQ) Must continue to hold 106 and clear 108.

XLF (Financials) 22.20 support, 22.50 pivotal and 22.85 the 100 DMA

KRE (Regional Banks) Has to clear 38.50

SMH (Semiconductors) 54.54.10 good resistance with 52.25 ultimate support

IYT (Transportation) On February 4^th I featured this at 126. Now its trading 143. Wow

IBB (Biotechnology) 250 pivotal, 240.03 the 2016 low

XRT (Retail) 45.50 pivotal

IYR (Real Estate) I wished I had paid more attention to this sector-what a move