THE GREAT MARKET ROTATION

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We’ve always made the most money by trading market rotations.

And there are many different types of rotations that occur in the market - secular, cyclical, sector, etc.

There is currently a potentially large rotation underway where money is flowing out of mega-cap tech stocks and into small and mid caps, as well as some other specific sectors like health care and industrials.

So, how can we profit from this rotation? And is this a short-term or long-term rotation?

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First, let’s define what a rotation is.

A market rotation refers to the movement of investment capital from one sector, industry, or asset class to another within financial markets.

This phenomenon is often driven by changing economic conditions, investor sentiment, or market cycles.

Market rotations can occur over different time frames, from short-term shifts lasting weeks or months to long-term transitions spanning years.

IWM vs QQQ since July 1st

So how can we identify various market rotations?

5 Keys to identifying a rotation:

1. Interest Rates. Changes (and expected changes) in interest rates can prompt market rotations. Rising interest rates may negatively impact high-growth sectors, like technology, which rely on cheap borrowing costs. Conversely, financials might benefit from higher rates due to increased lending margins.

2. Inflation. Inflation can lead to rotations out of sectors with high input costs and into those that can pass on higher prices to consumers, and vice versa.

3. Sector Performance. Investors might rotate out of overvalued sectors and into undervalued ones, seeking better returns.

4. Earnings. Investors might rotate into sectors or companies showing strong performance and growth prospects while moving out of those with disappointing results.

5. Geopolitical Events. Trade tensions, wars, or changes in government policies can trigger market rotations as investors reassess risks and opportunities.

Do any of the above keys apply to the current rotations we’re witnessing?

• After the recent inflation data the market strongly expects the Fed to begin cutting rates this year.

• We’ve already seen large scale sector capital movement out of tech and into small/mid cap stocks (Btw we have an entire video in our geek university course dedicated to our approach on sector analysis)

• Q2 Earnings for megacap tech is off to a bad start (i.e. – the market ultimately did not like GOOG and TSLA reports).

• The 2024 election threatens potential changes to current government policies and possible re-escalation of trade tensions.

The market is currently hitting every one of these key points.

So, if we expect these factors to continue on their current trajectory, what are some trade ideas that may profit from a continued rotation?

Our Top 5 Favorite Rotation Trades

1. Long IWM

A quick comparison of the QQQs to IWM since July 1st shows QQQ down over -3% while IWM is up over 10%.

If the rotation continues we think IWM is likely to see continued capital flowing in. We are considering low risk/reward plays like call debit spreads in the September and October expirations targeting new ATHs at 250 or higher.

2. Short Semiconductors

A quick look at SMH (semiconductor ETF) shows rapid decline from 280 down to 240 in less than 2 weeks. GEX data shows market participants are expecting another leg lower, potentially down to 220-230 in the coming weeks.

3. Long Financials

The financials sector is one of the current market leaders up over 8% in the past month.

BAC, JPM, GS, all had decent Q2 earnings reports recently. Out of those our favorite is GS and we are currently considering adding a long strategy that targets the 500 strike and above in our educational portfolio. You can check out our community discord here for our latest market conversations and trade idea discussions.

4. Long Healthcare

The Health Services sector, led by UNH, is leading the market over the past month up over 11%. We currently have a bull put spread on UNH in our educational portfolio but several other names also stand out as potential ideas.

5. The Contrarian Play

If you’ve followed us for very long, you know that we utilize an asymmetric risk/reward methodology as part of our trading strategy.

 This means that we give our portfolio opportunities to profit in various market outcomes.

 Often times this results in making contrarian plays that go against our primary positions by utilizing low risk, high reward strategies. We expect these plays to have low probabilities (hence why they are contrarian to our base case scenario) but they can often serve as profit centers and partial hedge protection in the case the market goes against our primary bias.

In the current market setup, that would mean putting on a bullish play (i.e. – an OTM call debit spread) on a semi conductor name like NVDA, even though we may be simultaneously short SMH.

These are our top 5 favorite ways to play the potential “great rotation” that may be underway, and we continue to assess the data and update our portfolio accordingly.

If you’re interested in accessing to our tools and analytics, be sure to check out our website!

• Thanks for being part of our community and know that we invite your feedback!

• Stay with us in Discord as we share real-time GEX data as we see it and we have some active subscribers also sharing what they see, including in the free channel. Thanks for reading!

• We have a variety of educational videos on YouTube as well!