The Great Mini Rotation

03/04/2014 6:00 am EST

Focus: STOCKS

Adam Sarhan

Founder & CEO, Sarhan Capital

Investors move their money from overbought sectors to weak sectors during a bull market, keeping the rally alive, notes Adam Sarhan on Minyanville.com.

Market Update: Stocks Are Strong
The S&P 500 (SPX) is up over 5% in Feb. and up a whopping 7% from February's low (1737). In a normal (non-QE) world, a 10% move for the entire year would be considered healthy. So, 7% in less than a month is very impressive and speaks to how strong the bulls are right now. Remember that markets do not go straight up, so be careful chasing stocks that have already had big moves.

Great (Mini) Rotation: The Heart of the Bull
Earlier Friday Todd Harrison noted weakness in a slew of high-beta names after a big move. So, how can the market hit new record highs if high-beta names are falling? The answer is a term I coined in early 2013: the Great Mini-Rotation.

In early 2013, everyone was talking about the Great Rotation (capital flowing into stocks and out of bonds). A closer look beneath the surface shows a Great Mini-Rotation unfolding, i.e. strong sector rotation. One of the hallmarks of a strong bull market (present market included) is that the major averages relentlessly rally. How are they able to do so if leading stocks pull back? They do this because capital flows to other areas of the market precisely at the time when overbought names (in this case the high-beta names) need to pause and digest their recent moves. Then, after some time passes, the new hot sector pauses and capital flows back into the former sectors. This cycle repeats itself time and time again.

For example, housing stocks and financials have been underperforming in recent months. On Thursday, the SPDR S&P Homebuilders ETF (XHB) broke out of a bullish eight-month flat base. Earlier Friday, the Select Sector Financial SPDR ETF (XLF) broke out of an advanced entry point within a shorter flat base and is setting up rather well to break out of resistance in the near future.

Negative Sentiment as a Bullish Indicator
It always amazes me how many people doubt (or hate) this rally. Since emotions are a key driver of stock prices, this (negative sentiment) is a very powerful bullish indicator. Remember that bull markets typically do not end in pessimism; they end in euphoria. They end when the last bear has been hunted down. This bull continues to do a great job of taking as few people along for the ride as possible. Hopefully, you are one of them. One way I overcome making emotional decisions is by trading on what I see happening, not what I think will happen. Remember to keep things simple. Always keep your losses small, and never argue with the tape. Trade wisely.

By Adam Sarhan, Contributor, Minyanville.com

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