When are We Finaly Going to See a Rotation Out of the Mag 7?
Overconcentration in Equity Markets
The Magnificent Seven have by far been the best performers ever since the AI frenzy began. These big tech companies have been holding the major indices up while their underperforming peers have been waiting on the sidelines.
More recently, some have been calling it the Magnificent Six ever since $Tesla(TSLA.US$ lost around 30% of its value. $Apple(AAPL.US$ and $Alphabet-C(GOOG.US$ have been showing signs of difficulties as well. Is this a signal that investors are beginning to take some profits from the Mag 7 and rotate that capital into other underperforming sectors in the market?
Is This a Melt Up?
Companies like $Meta Platforms(META.US$ and $NVIDIA(NVDA.US$ have been excessively outperforming over the past several months. Along with some healthcare companies like $AbbVie(ABBV.US$, which saw massive bullish sentiment after the approval of a breakthroug weight-loss drug.
Obviously, everyone is happy and making money right now in this euphoric market. But things are starting to look like a melt up. Melt ups can last a long time, and there are a lot of very profitable opportunities during a melt up. But when the melt ups end, they are usually followed by a significant selloff.
Basically, everyone is sitting in profit. So when the first batch of selling happens, a domino effect insues as everyone sees their profit decrease. Selling begets more selling when everyone is profiting after a very sharp rally. Some call this the waterfall effect.
There is not always a waterfall. The melt up might simply consolidate sideways as capital moderately rotates into other sectors or companies. So when is it time to take profit before the waterfall?
Watch for Defensive Posturing to Avoid the Waterfall
The very beginning of the year started off on a slightly defensive posture as the Mag 7 were slightly underperforming. But J. Powell's talks about rate cuts propelled the Super 7 back into the spotlight.
Companies like Apple and Google have been showing signs of investor exhaustion while certain underperforming companies' share prices are rallying. This could be a very small sign of capital rotation.
On days like today, when you see tech, communications, and semiconductor companies underperforming, then you might think, what are all of the investors buying? If investors' capital were being deployed in a broad based manner, across all underperforming sectors, then this is a good sign that the rally is broadening out into the entire market. We saw this happen today.
If you see the majority of the buying mostly isolated within the defensive sectors like healthcare, utilities, and staples, then I would worry a bit more about the near-term outlook in equity markets. If investors are getting excessively defensive following a very sharp multi-month rally, then I would worry about a potential correction in the near future.
Conclusion
Today was just one day of the rally broadening out while big tech took a break. Is the rally going to end soon? There is a high cash allocation in money manager accounts, so there is plenty of fuel to keep this rally going. The question is, will the money keep going into the Mag 7?
Personally, I don't think that this tech rally is over. Tech could slow down or cool off a bit, but there are no strong indications of that yet. I do believe that soon, the rally will broaden out further, and other parts of the market will start providing more participation in comparison to big tech.
The only thing I can think of that will cause a waterfall effect is if something in the economy breaks due to the lag effects of interest rate hikes or geopolitical conflict.
Some parts of the market are feeling some pain as they realize that rates are likely going to be higher for longer than investors thought. We have seen this recently in the real estate and regional banking sectors. But the Fed is not going to raise any further, and rate cuts likely to happen this year, so I think sentiment will remain bullish. Even though it may be a bumpy ride. Just keep an eye out for excessibe defensive postureing.
Good Luck Trading
As always, I am not a financial professional, and this is not investment advice. Be careful and be patient. Dont anticipate the market. Rather, participate in the market. Don't invest money that you can't afford to lose. Give some of your investments time and know when to cut your losses.
Don't be greedy. Don't invest in anything you don't understand. Don't put all of your eggs in one basket. Don't listen to the hype. Don't fomo or panic into or out of trades. Do your own due diligence. And just follow the trends. A trend is your friend. Good luck trading.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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JonnyBets : thanks
SpyderCallOP JonnyBets: For sure
ZnWC : This article gave more details about Rotation out of Magnificent 7.
2024: A Rotation Out Of The Magnificent 7 - Seekingalpha
SpyderCallOP ZnWC: Thanks for the link
118062799 : I don’t know why Tesla is “Magnificent 7”
SpyderCallOP 118062799: TSLA has not been very magnificent lately.
MonkeyGee : I have rotated out already. holding last years losers like DIS, PFE and TRIP.
SpyderCallOP MonkeyGee: I like the idea of rotating I to DIS and PFE. Disney is already in its way up from the bottom. PFE looks like it needs a little more of a push to start climbing.
MonkeyGee SpyderCallOP: Yeah, these are my long-term. You don't have to watch and can sleep at night. Last week, I was thinking of liquidating one of my smaller accounts and just go all in Disney.
SpyderCallOP MonkeyGee: Don't put too much in one name.