The Dow Jones Industrials showed relative strength Monday as investors seized on good news and economic indicators turned higher. Cyclical stocks were back in favor, with rotation in value related sectors. Energy, transportation and materials stocks were our focus on Monday.
Summary
The (DIA) gained 0.70% (+ 238.38) points, followed by the S&P 500 up another 0.27% (+11.49 points), while the Nasdaq lagged by 0.44% (-64.04 points). It was obvious that growth stocks were the shunned in favor of value stocks.
Cyclical Stocks Take the Lead
Value stocks included candidates from the energy, materials, and transportation sectors with cyclicals gathering momentum.
National Oilwell Varco (NOV) and Baker Hughes (BKR) lead the day on higher volume. Baker Hughes saw buyers from the open to closing bell in-part due to an upgrade at Barclays (BCS), lifting its price target to $28, on optimistic oilfield services and equipment data.
In the interim, technology stocks have lost momentum, while the Nasdaq composite avoided a distribution day with a close on lower volume. Growth stocks like Alphabet (GOOGL), Microsoft (MSFT), Facebook (FB) and Amazon (AMZN) reflected a change in sentiment. Tesla (TSLA), DocuSign (DOCU), Advanced Micro Devices (AMD), Skyworks (SWKS) and Atlassian (TEAM) also lagged the broad market.
Sector Rotation
We will focus on the top two quadrants, with improving sectors in the top left and leading sectors in the top right. These sectors are in focus for the rest of the week.
Good news is pertistent, as the financial media pumps vaccine data and economic reopening statistics by the hour. The airwaves and markets echo positive sentiment. This suggests a recovery in global demand despite some negative news (rising Covid cases) in India.
In addition, the Baltic Dry Index reflects a major uptick in maritime shipping.
Sentiment lifted as economic recovery gains momentum in the manufacturing sector. Underlying data “suggests that activity is still expanding at a solid pace,” Jefferies said.
We can see the “manufacturing” activity in the chart below. The lower panel illustrates momentum mirroring that of previous cycles. In addition, the two previous bullish momentum changes suggest more than 12 months (on average) of expansion in the coming months.
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Happy Trading,
Vinny
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