After a string of up days, the old market leadership of technology and consumer discretionary is looking tired, and that is probably a good thing. There are two problems: seasonality and valuations. Seasonality: It’s a tough time of the year It’s a tough seasonal period for stocks. The broad market tends to drift lower from mid-July through August. “Most people think that all of seasonality can be wrapped up in the old saying, ‘Sell in May and go away,'” Tom McClellan, editor of The McClellan Market Report, told me. “But there is a second seasonal peak in mid-July, which marks the transition to the seasonally weak period from July to October.” Since 1950, August is the third-worst month for the S & P 500, while September is the worst month. Tough seasonality (Worst months for S & P 500, since 1950) September down 0.5% February down 0.04% August up 0.07% Source: The Stock Trader’s Almanac Valuations Market bulls have fretted for weeks that tech stocks have been overbought and are due for a pause. “There’s no question growth appears overbought on the surface and valuations are certainly elevated,” Nate Geraci from the ETF Store told me, nothing that most growth ETFs such as the Schwab U.S. Large-Cap Growth ETF (SCHG) are extremely overbought. How overbought? The Nasdaq 100 ETF (QQQ) is roughly 25% above its 200-day moving average. That is “historically extreme,” Todd Sohn from Strategas told me, though it is consistent with coming off major market lows. Those calling for a pause may be getting their wish. A torrid two-month rally has lifted the S & P Technology Sector (XLK) by 16%, but tech has mostly been for sale in the last few days. Alphabet, AMD, Amazon, Salesforce and Meta are all down this week, though Microsoft and Apple are still up. XLK YTD mountain Technology Select SPDR YTD Some of the weakness this week may be due to the Nasdaq 100 special rebalance, which will take place Friday at the close and become effective before the market open on July 24th. Under this rebalance, Apple, Microsoft, Amazon, NVIDIA, Meta, Tesla and Alphabet will see their weighting in the Nasdaq 100 reduced. Regardless, the rally “suggests that the XLK [Technology Sector] is due for a period of consolidation or some profit-taking,” John Murphy writes on Stockcharts.com. While that does not necessarily mean the rally has ended for the year, “it may encourage investors to rotate some money into weaker parts of the market that offer better value like healthcare and small caps,” he said. Rotation is the main game for the bulls That is exactly what is happening, to the delight of bulls. Banks, energy, health care, and consumer staples have been leading recently, while Technology has lagged. “Today’s strongest sector is healthcare,” Murphy said, noting that the Health Care ETF (XLV) is on the verge of breaking through its April high, led by UnitedHealth, Johnson & Johnson, and Abbott. Ed Yardeni agrees. “Health Care has been an underperformer, and I think they’re do for a run,” he said on our air this week, but then added, “Financials have been an underperformer, and I think they’re due for a run, so I think it’s going to broaden out.” Still, for investors in the S & P 500, McClellan says no one should be surprised to see a summer correction in the next month or so. “Right now the odds are not in favor of the bulls, so take some time off and enjoy your 5.25% T-bills,” he told me.
