3 Things to Look for During This Volatility Storm
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Yesterday was a tumultuous day in the markets. We saw stocks that have been the biggest gainers for the past year drop double digits. And funds flow into sectors that have been ignored for much of this year.
When I wrote to you about a potential sector rotation last week, this is exactly what I was talking about. But it’s happening in some really interesting ways as the market is broadening away from just the major tech stocks that have single-handedly dominated much of this year, and instead, giving gains to more forgotten sectors.
We are in a sea of volatility right now which provides us with some immense opportunities to play this the right way.
So today I want to talk about 3 things:
- Broad vs Narrow Indexes
- The Completion of a Stock Rotation
- Gold vs Bitcoin
- Broad vs Narrow Indexes
Recent trends have shown that narrow indexes, especially those heavily weighted towards top NASDAQ stocks like the Mag Seven, have outperformed broader indexes.
For instance, the QQQ, which is densely packed with these tech giants, has consistently outshined the SPY and the Russell 2000 — both of which are broader and cover a larger range of stocks across sectors and industries.
You see, we’ve seen the majority of this year’s gains come from a handful of stocks in the tech space and a few notable exceptions. That means wider indices with more underperforming stocks in their basket have lagged behind greatly so far.
This raises a crucial question: as we see shifts in market dynamics, will this trend of narrow indexes leading the charge continue, or will broader indexes start to catch up?
Watching how these indexes perform relative to one another in the coming months could provide valuable insights, especially if broader economic factors like interest rate changes or political events start to influence market health.
And what we are now seeing may very well be the beginning of the market broadening.
I believe we could see a dramatic shift as broader indices start outperforming narrow ones, especially if interest rates come down and a more conservative government is voted in.
- The Completion of a Stock Rotation
As sectors like technology have soared, traditional industries such as industrials, energy, and utilities have lagged.
However, what we have been observing the past week is a potential shift on the horizon.
It’s always interesting to watch the markets right around the 1st and the 15th of the month to gauge where money is flowing. Think about it: Most people get paid on the 30th or 1st of the month and again in the middle of the month.
And when people get paid, many of them have automatic deposits into retirement accounts and pensions.
If we see large swaths of money flowing into sectors which haven’t been seeing as much inflows lately, we can attribute much of this to mutual funds and retirement account funds being directed towards new areas.
This is about more than just chart patterns — it’s about understanding the inflows of capital that could precede a major shift in sector performance.
Watching the money flow can clue us in if a longer-term sector rotation is underway, and this can give us a head start on which sectors will move more strongly in the future.
As I first shared last week, we are seeing money flow into areas that have been previously overlooked for much of this year. I shared that if we saw this trend continue then we may be seeing a larger sector rotation at play… Since then, we have seen the trend continue.
Just take a look at where money has been flowing the past 5 days.
As we can see, areas like real estate, materials, industrials, financials, energy, healthcare, consumer staples, and utilities have all seen massive gains in the past week.
Meanwhile, the darlings for much of this year — technology and communication services — have lagged.
- Gold vs. Bitcoin
In times of uncertainty, investors traditionally turn to gold as a safe haven.
However, Bitcoin has emerged as a modern contender for this role, though its ability to act as a digital gold is still up for debate.
The contrasting performance of gold and Bitcoin during market downturns and their levels of stability are interesting to look at. There’s no doubt that gold is more stable when compared to Bitcoin.
Just look at Bitcoin’s volatility present in this chart:
Did Bitcoin outperform gold in the long run during the three-year period? Yes, but at one point Bitcoin was down 50%, and gold held constant. So we haven’t quite seen the volatility bugs worked out of Bitcoin.
But, while gold remains a proven safety net, Bitcoin’s growing worldview as a “store of value” and its comparison to gold during these times could redefine its place in the markets.
We need to watch how well Bitcoin performs, not just in bull markets but also in downturns and shifting markets, like we find ourselves in today. This will help us understand if Bitcoin can be a true “digital gold” and a unique hedge to play in uncertainty or if it’s just another speculative asset.
—Nate Tucci
