July Mid-Month Conference Call: 5 Key Takeaways

1. Small Caps Have Arrived

Sector rotation is the lifeblood of a Bull Market. And this cycle is no different than the ones that came before it.

Small-Caps are back in the game, printing their best 5-day streak since 2020.

Whether you look at value or growth within this market cap-segment, both are reaching new multi-year highs, adding to our conviction that this is a valid primary trend reversal in the Russell 2000.

This action not only represents fresh air for the market as more stocks should start working… but it also speaks to risk-seeking behavior among investors.

The fact both growth and value are making new highs tells us this trend is about broad strength in small caps, not one factor or another. The bottom line is rotation into smaller stocks is in full effect in recent weeks and we think it continues over longer timeframes. 

We will be focusing on the Russell 2000 for long opportunities in the future.

2. Industrials Remain on Top

With the market slated for a healthy sector rotation through the back half of the year, we want to focus on value-oriented sectors.

The chart below shows Small Cap Industrials $PSCI pressing against the upper bounds of a flag pattern as buyers try to take out this level and send prices to new all-time highs:

If and when PSCI breaks out of this formation, it wouldn't be a surprise to see more and more value groups follow suit.

Industrials have been a leadership sector all along the market cap scale this cycle. We think that continues as other areas like financials and materials join in and start performing better as well.

3. Tech Back at the Scene of the Wreck

Another way to evaluate the current sector rotation is through relative trends.

As you can see below, the Large-Cap Technology Sector (XLK) vs S&P 500 (SPY) ratio is approaching a level last seen during the dot-com bubble peak, indicating a logical place to take a breather.

As long as this relationship is stuck below this overhead supply zone, we’re likely to see value-oriented groups catch flows and assume a leadership role, at least over short and intermediate-term timeframes.

Remember, tech stocks can continue to trend higher on absolute terms even as they might underperform the overall market. We think this is the kind of environment we’re headed for now.

4. Put it in the Bank!

When talking about areas that will benefit from sector rotation, banks are top of mind.

Below is our index of the Big 6 banks, traversing a series of previous highs:

Before we can rely on a Financial sector breakout at the index level, we need to be sure that the largest weightings and top stocks are on board and participating to the upside. The 6 largest banks in the US that comprise this index are also some of the largest holdings in XLF.

As long as this breakout holds, the path of least resistance will be higher and we expect growing participation and more leadership from this sector in the future.

5. Global Investors Reach for Risk

When we look outside the US, even the riskiest stocks in the world are joining the party.

Below we have the Freedom 100 Emerging Markets ETF $FRDM breaking out of a multi-year base to new all-time highs:

This ETF uses third-party quantitative metrics to rank personal and economic freedom in every country around the world, and weights the index in accordance.

Among its major country exposures are Taiwan, South Korea and Chile, which make for almost 60% of the fund.

The fact that FRDM is reaching new highs speaks to broadening participation overseas, supporting the next leg higher for global equities.

As always, Premium Members can rewatch the Conference Call and view the slides here!

We hope you enjoyed our recap of this month’s call. Thanks for reading, and please reach out to us with any questions!

All Star Charts Team