The Rotation is REAL!

Finally, the gains are expanding to some unloved corners of the market [Morning Reckoning] July 16, 2024 [WEBSITE]( | [UNSUBSCRIBE]( The Rotation is REAL! Baltimore, Maryland July 16, 2024 [Greg Guenthner] GREG GUENTHNER Good Afternoon Reader, We’ve talked about it for months… Heck, we might have willed it into existence. For whatever reason, the illusive bull market rotation we’ve patiently waited on is finally materializing. Today, we’ll discuss what a bull market rotation entails, how it works, and, most importantly, how we can profit from the inevitable rallies that could power the market higher in the weeks and months ahead. First, some quick background… Unless you’ve completely detached from the financial noise machine, you already know Big Tech and the stalwart semiconductors have grabbed this market by the ear way back in January and dragged it to new highs. Yet while names like NVIDIA Corp. (NVDA), Super Micro Computer Inc. (SMCI), Microsoft Corp. (MSFT), and Alphabet Inc. (GOOG) dominated the tape, many other stocks and sectors started to fall behind. Even more impressive has been the mega-caps ability to shrug off extreme overbought conditions, completely ignoring some obvious signs of exhaustion while continuing to push to new record highs week after week. It’s truly a sight to behold. To be clear, I'm not the only one yapping about this top-heavy market. Nearly every major analyst has mentioned the dominant mega-caps going back to early 2023. But as we discussed earlier this year, the stock market doesn’t care what we think! Over-saturated? Overvalued? Overbought? All three might be true – but it hasn’t stopped these stocks from screaming higher. It’s also worth noting that despite these newfound rotations, the semiconductors haven’t stalled out just yet. In fact, the VanEck Semiconductor ETF (SMH) is still sporting a year-to-date gain of nearly 60% (as of yesterday afternoon, the ETF is less than 4% from its all-time highs). The NYSE FANG+ Index also remains a force to be reckoned with as it sits on a year-to-date gains of almost 40%. For comparison, the S&P 500 is sitting right near its all-time highs and is up “only” 19% so far this year. The biggest of the big remain firmly in control of this market. But something new has happened over the past week. While the leaders are still clinging to their gains, traders are beginning to rotate to other less-loved corners of the market. This has led to some fast and furious rallies that are hinting at a potential midsummer leadership change… [Response Requested 1/1000th of an ounce of gold available]( You're being offered a 1/1000th of an ounce of gold when you upgrade your account. It will come in the form of a “Gold Back” - a new type of gold currency that’s starting to spread across America ([click here to view](. [Click here to learn how to claim your new Gold Back Currency<]( [LEARN MORE]( The Next “Hot Money” Trade So, how do these market rotations typically play out? During these rotation events, the market’s strongest stocks consolidate or retreat as other stocks and sectors begin to outperform and take on new leadership roles. If you learn how to spot and take advantage of these rotations, you’ll find that you can grab onto emerging trends and ride them to fresh highs as they begin to dominate the market. Let’s get back to the big question we asked earlier this year: When the streaking semis finally get doused with a bucket of cold water, which stocks could pick up the baton and start running? Well, we’re finally seeing key breakouts emerge in some forgotten corners of the market. My favorite (and strongest!) move unfolding right now is the monster breakout in the small-cap Russell 2000. We’ve been watching and waiting for a small-cap resurgence since the melt-up rally began late last year. The Russell 2000 initially snapped out of its stupor and broke above its December highs following a rocky start to 2024. But it wasn’t able to harness this momentum and extend higher during the first quarter. Instead, small-caps sank back into a choppy range while the mega-cap leaders dominated the tape. Frankly, small-caps have been a mess for months. We’ve witnessed not one but two false breakouts so far this year as the Russell 2000 badly lagged the major averages. That all changed late last week… A midweek surge shot the iShares Russell 2000 ETF (IWM) back above 200… and it hasn’t looked back yet. Following yet another gap higher at today’s open, and the Russell 2000 is now up more than 8% since Thursday morning. That’s an incredible move for these stubborn, formerly range-bound small-caps! Remember, the Russell 2000 has grossly underperformed the major averages for nearly two years. The Russell was hit hard by the regional banking crisis in early 2023. It also failed to rally with the major averages into the summer months, leading to a hard reset that lasted from August through October. Most mega-caps were stable during this period while smaller names took a beating, acting as a safe haven for investors worried about the potential for a bigger drawdown heading into the fourth quarter. When the big move lower failed to materialize and the melt-up rally ignited, the Russell flipped its switch and posted a 20% move off its lows. It’s consolidated in a wide, frustrating range ever since. Now, we’re finally seeing a powerful breakout that could take these small stocks much higher. Are these our new market leaders as the third quarter begins in earnest? It’s possible. Now that IWM has stabilized and is approaching its 2021 highs, more traders and investors will feel comfortable buying back in. If the rotation theme continues to play out, we could see the smaller stocks outpace the big boys – even if the major averages decide to take a break. The move has been dramatic. After all, no one was really expecting it. Despite the fact that some of these stocks are short-term overextended, we think they’ll soon consolidate and offer alert traders solid entry points. This move isn’t finished yet! Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com [Elon Musk’s Genius Plan to Save the US Dollar from Collapse?]( [Click here to learn more]( Elon is about to flip the switch on [his new money project…]( And it could trigger the biggest change to our financial system since the creation of the federal reserve in 1913. Could this save the US dollar from a complete collapse? [Click here to see the details because]( Elon said he could flip the switch “as early as mid 2024.” [LEARN MORE]( In Case You Missed It… Saudi and Russia: Best Buddies Sean Ring, Editor [Sean Ring] SEAN RING Dear Reader, Some of the best friendships start that way. A knockdown, dragout brawl kicks things off. A brutal beating was taken on both sides. A moment of clarity ensues. The look that says, “What did we start fighting over to begin with?” A shoulder shrug, indicating no one can remember what the catalyst was. A smile. A handshake. And a drunken night out with raucous backslapping and man hugs to consummate the new, fast friendship. It seems the Saudi-Russian bromance knows no bounds. Since their kerfuffle in the oil market crash of 2020, MBS and Pooty Pooty have been fast friends. And if the news is to be believed, the Saudis went above and beyond the call of duty to their relatively new friends. According to [Bloomberg]( Saudi Arabia whispered to its buddies earlier this year it would sell its European debt holdings if the G7 seized $300 billion in Russia’s frozen assets. “Whispered,” in this context, means “quietly threatened.” Let’s get into this newfound friendship and why it’s such a big story on the political stage. The Russia/Saudi relationship experienced significant shifts after the oil crisis of 2020. Here’s a detailed look at how their relationship evolved. The Oil Crisis of 2020 In March 2020, a “disagreement”— their word, not mine — between Russia and Saudi Arabia over oil production cuts led to a price war. This was in the period of collapsing global demand thanks to the government-mandated private sector shutdown known as the COVID-19 pandemic. Initially, both countries increased production, flooding the market with oil and driving prices to historic lows, even into negative territory for a brief period. Changes Post-2020 Oil Crisis After the initial price war, both countries recognized the mutual harm of continued low oil prices. In April 2020, they and other OPEC+ members agreed to historic production cuts to stabilize the market. This marked a significant reconciliation and deepened their cooperation within the OPEC+ framework. Post-crisis, Saudi Arabia and Russia managed oil production and supply together. They coordinated subsequent agreements to adjust production levels in response to market conditions, demonstrating a more unified approach to oil market management. The crisis underscored the importance of collaboration between the two major oil producers. Both countries expressed a commitment to long-term cooperation to avoid future market destabilization. This strategic partnership started to extend beyond oil, involving discussions on broader economic and political cooperation. And that’s where it started getting interesting. Their relationship saw an increase in joint investments and economic initiatives. Both countries explored opportunities in energy projects, infrastructure, and other sectors to diversify their financial ties. The oil crisis acted as a catalyst for closer diplomatic relations. Both countries recognized the importance of maintaining a stable and cooperative relationship to increase their benefits internationally. They took a more proactive role in stabilizing oil prices and engaged in continuous dialogue and regular meetings to assess market conditions and adjust production levels. Saudi Arabia and Russia also developed better crisis management mechanisms to prevent future disagreements from escalating into price wars. These included more transparent communication and a willingness to compromise on production decisions. To be fair, it was much easier to develop this relationship because the U.S. experienced its shale oil revolution, and the Europeans caved into their Green parties, getting scammed into less efficient alternative forms of energy like wind and solar. This and the crisis highlighted the delicate balance of power and influence in the global oil market. Saudi Arabia and Russia, through their collaboration, aimed to counterbalance the influence of other major players, particularly the United States, in the global energy landscape. Country Saudi Crude Oil Imported (bbls/ day) China 1,780,000 Japan 950,000 South Korea 860,000 India 710,000 United States 500,000 Saudi Has Russia’s Back Therefore, the Saudis' threat to dump European bonds if the G7 confiscated $300 billion in Russian assets is a strategic move analyzed through several lenses, reflecting geopolitical, economic, and strategic considerations. Saudi Arabia and Russia have a significant partnership, especially in the energy sector. We know they’ve worked closely within the framework of OPEC+ to manage oil production and prices. The Saudis view confiscating Russian assets as a destabilizing move that could harm their ally and, by extension, their interests in maintaining stable oil markets and prices. Europe is a major trading partner for Saudi Arabia, and the Kingdom holds substantial investments in European assets, including bonds. Threatening to dump these bonds is a way for Saudi Arabia to leverage its economic power to influence G7 decisions, signaling that punitive actions against Russia will have broader repercussions for the global financial system and will not be tolerated. By threatening to dump Europe’s government bonds, Saudi Arabia is warning of potential financial instability that will arise from such a large-scale daylight robbery. The sale of a “chunk” of European bonds will significantly impact yields and borrowing costs for European countries, potentially triggering a broader financial crisis. Saudi Arabia's threat is also a defensive move. If the G7 sets a precedent by confiscating Russian assets, other countries with significant holdings in the West, including Saudi Arabia, fear similar actions in the future. In this light, the threat can be seen as a determined move to protect their financial interests. The threat should also be interpreted as diplomatic signaling, indicating Saudi Arabia is willing to take drastic measures to support its geopolitical and economic partners. It reminds us that actions taken by major powers like the G7 have unintended, far-reaching consequences. Wrap Up The Saudis' threat to dump European bonds in response to the potential confiscation of Russian assets by the G7 is a complex interplay of geopolitical strategy, economic interests, and financial stability concerns. It reflects the intricate web of relationships and dependencies that characterize global politics and finance. Saudi can’t be counted on anymore to do the U.S.’s bidding, those days died with Kissinger. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Greg Guenthner] [Greg Guenthner, CMT,]( is chief strategist at Forge Research Group. He has spent the better part of the past two decades developing long-term and short-term strategies with a single goal in mind: to help everyday investors generate outstanding returns and control their financial futures. Greg’s charts, analysis, and insights have appeared in Marketwatch, Forbes, Yahoo Finance, and many other financial publications. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. 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