Traders eye possible signs of another market rotation

Trump or tech? Once again, traders are taking sides.

It might sound simplistic, but market watchers have noticed two clear themes since the president’s surprise election ten months ago:

  • November–February: The “Trump trade” launched amid hopes that tax cuts and deregulation would stoke the economy. That helped lift interest rates, which was good for banks. It also helped lift the U.S. dollar (good for domestic stocks like small caps). Industrials and transports went along for the ride.
  • February–August: Technology ripped back to life, led by strong fundamentals in mega caps like Apple (NASDAQ: AAPL), Facebook (NASDAQ: FB), and (NASDAQ: AMZN). Semiconductors ramped at a frenzied pace. Bond yields also retreated as gridlock in Washington dampened economic enthusiasm. That additionally favored tech because the sector tends to have richer price/earnings ratios. Global stocks followed as the U.S. dollar slid lower.

Has a third wave of rotation begun? Some traders are starting to think so.

The first thing they cite is the six percent gain in the Russell 2000 small-cap index over the last month. This is, after all, the same index whose scorching run last November put the “Trump trade” on the map. Transports have run even more of late, while tech has moved in the opposite direction. Next, banks and financials. Yep, another Trump sector has moved steadily up since bouncing at its 200-day moving average earlier in the month. The U.S. dollar has also clawed back from a 2½ year low as the policymakers at the Fed cut back on years of almost-free money.

Philadelphia Housing Sector Index, 4/3/17 - 9/26/17

Source: OptionsHouse by E*TRADE

All those sectors are back near old highs, but haven’t broken out. The same cannot be said for housing. Yesterday, the Philadelphia Housing Sector Index pushed to its loftiest prices since the real-estate bubble was running full speed in mid-2005. Seriously?

It’s not like newspapers and websites have been packed with good news. Most industry reports like home sales and builder sentiment have missed estimates. Hurricanes have buffeted business and a shortage of workers has slowed construction.1

Fine, the bulls seemed to say, new homes might not be going up, but there’s more than one way to skin a cat. How about a companies like Trex (NYSE: TREX) or Builders FirstSource (NASDAQ: BLDR), whose products are used to rebuild after the storms? Both of those players are up more than 15 percent in the last month and chalked up new 52-week highs yesterday. Home Depot (NYSE: HD), a better-known supplier, hasn’t moved as fast but also hit new records. Drywall maker USG (NYSE: USG) has been cranking, too.

Meanwhile, some of the big builders like D.R. Horton (NYSE: DHI) and PulteHome (NYSE: PHM) are within striking distance of new highs. 

Bottom line: Traders seem to think housing may be poised for a breakout as the market shows signs of another sector rotation.


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1. Marketwatch: Builder confidence slips in September on worries about labor, materials availability. 9/18/17. RTTNews: U.S. New Home Sales Unexpectedly Plunge 3.4% In August. 9/26/17. Marketwatch: Existing-home sales fall in August for the fourth time in five months. 9/20/17. CNBC: Hurricanes and higher rates tank mortgage applications, down 9.7%. 9/20/17.