Rotation is Turning Bullish; Shorts Beware!

A key rotational change took place in December 2021 as the S&P 500's final high was led by defensive sectors - never a good sign.

I wrote and talked about it then as it was a major contributing factor that led me to declare the market top in late December/early January. I then discussed my potential target on the S&P 500 of 3500-3800 at MarketVision 2022, held on Saturday, January 8th. The U.S. stock market is probably THE key leading indicator. When the S&P 500 sets new highs, it's generally a bullish statement about the U.S. economy. But when those highs are led by defensive sectors like consumer staples (XLP) and utilities (XLU), it's giving us quite the contradictory statement as Wall Street is clearly growing more defensive. Many times that can be the "nail in the coffin" for the bulls. Well, the opposite is typically true when the S&P 500 bottoms. New lows on the S&P 500 are a bearish statement on the U.S. economy, but if rotation is moving back INTO aggressive sectors like technology (XLK) and consumer discretionary (XLY), Wall Street is prepping for a bottom and big rebound. From the S&P 500 low on May 20th at 3901.36 to the Friday, June 17th close at 3674.84, this benchmark index fell 5.81%. Here's the breakdown on how the S&P 500, the NASDAQ 100 ($NDX), and our 11 sectors performed over this 4-week period:

First, note the top two performing sectors - staples (XLP) and discretionary (XLY). Why would consumer stocks show relative strength? Isn't everyone now finally talking about a recession (for what it's worth, I was telling EB.com members months ago that a recession is what everyone would be talking about once inflation talk began dying down)? Who would want to own consumer stocks as we head into a recession? Wall Street, that's who! Why did Wall Street turn defensive in December, ahead of a market top? It's easy to answer that question now, isn't it? They were prepping ahead of time for the inevitable drop that I was cautioning everyone about 6 months ago. So now, let me ask you that question again. Why would Wall Street be buying consumer stocks over all others, just as we head into a recession? Here's your answer: This year's S&P 500 performance (-23%) has discounted all the bad stuff already. The price weakness always comes before the awful fundamental news. Now retail traders are extremely bearish, saying the market can't go anywhere, but down. Wall Street disagrees. I'm sticking with Wall Street and calling a bottom here.

Because of the sudden change in rotation, I am "re-drafting" stocks and ETFs for our Portfolios. All changes will take place at the opening bell on Tuesday morning. I will be sending out the new portfolios later tonight as I work on the changes all day long today. If you're not currently an EB.com member, you can gain access to these 50 new stocks and 10 new ETFs by signing up for a FREE 30-day trial to our paid service. CLICK HERE to start your trial now!

It's time to go long.

Happy Trading! Tom Bowley Chief Market Strategist EarningsBeats.com Better Timing. Better Trades.