Mass Rotation of Capital Can Cause Mixed Market Signals

Last week's mixed markets are showing indications of investors rotating their capital between sectors. Tech appears to be on a comeback at least temporarily. The China reopening trade is still in full effect but when and how big will the first initial correction be? Commodities appear to be joining the China trade. Technically speaking US equity markets are still looking long-term bearish and short-term bullish. After seeing last week's big sell-off during the beginning of the week followed by a massive green day on Friday, I am on the fence on how this week will play out. I'm leaning toward bullish until some economic data, or earnings report release changes this notion. Lastly the fragile crypto markets are in rally mode as well. Are there any legs to this rally or will the crypto rally taper off quick?

When there is a change in the market dynamics or a change in the market trends then typically you will see the underperformers become the outperformers. This happened in January last year when investors flocked to the value stocks of the Dow Jones and divested from the tech space of the NASDAQ. This rotation was caused by the Fed's interest rate hiking regime. This rotation of capital will flow back into tech eventually. This has happened in the past several times. Similar to the bear market rallies of last year, this rotation occurred last week as you can see in the picture below. The technology sector and the tech heavy communications sector performed much better than all other sectors combined. For technology companies to truly outperform this year then the Fed must discontinue the interest rate hikes.

I do want to quickly point out that there was a major rotation of capital out of the military industrial/defensive sectors last week. When the Russian army began amassing troops on the border of Ukraine investors began to rotate capital into the sectors that performed well during war times. You can see these sectors in the picture directly above. When there is some sort of resolution to the Russian war and the fighting ends then you can be confident that investors will move their capital out of the equities in these sectors and back into other investments like technology. You might even find some good short opportunities.

Chinese equities have been rallying for the past few months and they don't seem to be showing any signs of slowing down. The rally is very overheated and needs some cooling off. But there are no signs of cooling off yet as Chinese stocks just keep going up. At this point it seems like you could buy just about anything Chinese and you are almost guaranteed gains. Also take note that a lot of industrial commodities are getting a boost due to the returned demand from China. There could be some nice gains to be made from swing trading some commodity stocks at the moment.

One thing that you should be aware of is the potential correction from a major rally. Big rallies are followed by big corrections typically. Many big bags of profit are being held in Chinese equities. A lot of investors are holding big gains so the first initial profit take could be substantial. Personally I would not be scared out of any long position during the first initial correction in Chinese equities. I believe it will be a great dip buy opportunity because I think this rally is nowhere near being over.

If there are any horrible earnings reports or very bad economic data next week then this could possibly be the catalyst to cause another rejection of these major resistance levels and a continuation back into the bear market trend. So keep your eyes out for earnings and economic data.

Cryptocurrency markets are experiencing a big rally from the 52-week lows similar to Chinese equities. Also similar to the China rally, crypto coins are overdue for a correction. Corrections after a rally are expected but crypto corrections are massive. Crypto is much more volatile than equities and the corrections can be much more disheartening than any other market. Just don't get caught buying at the high before a correction and selling at the low of the correction.

I don't have much faith in the crypto markets at this point. Just look at a few of the digital currencies that have halted trading for days or weeks already. As an investor you cannot ignore this very strong rally. I would still question buying any dip in the crypto market at the moment. Especially after all of the collapses in some exchanges and some individual coins and tokens. But sometimes the market will initiate a rally at the least suspecting time when things seem most bearish. After the first initial correction or dip in price, if cryptocurrencies continue to rally as strong as they have been recently, then things will be looking like the beginnings of a bull market for cryptos.