Divergence Ended: Institutional Rotation Took Over
The Divergence form last week ended as swiftly as it came: Huge Institutional rotation comes in and took the market over.
So, if you blinked last week, you missed what was one of the largest sector rotations I saw in the past year or so, taking the S&P 500, Oil, the Russell 2000, and the Dow Jones all up 3.45%, +9.11%, 3.85% respectively. What made this rotation a little “special” in my view was that even the Nasdaq 100, the previous leader prior to the rally, also participated and was +3.23% on the week.
This made me very happy because that was where a large number of my bullish calls were, and that helped us finish the week positive despite not having too many names on the bull side in other areas.
Normally when rotation occurs, you must act fast to add new names into your basket, and possibly even remove the names that are losing popularity, that was not the case this time.
As an options basket trader, however, I never just sit on my hands. To illustrate how important weekly analysis is, one name that drew my attention prior to the rotation was FedEx, which seemed to ignore the struggles of its industrial sector counterparts (see below).
As a balanced trader, this one I called out prior to the rotation in our discord, and if you took it, you were well-rewarded. As a comparison, take a look at industrials next to FDX below:
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When you do your homework and build out weekly watchlists, the early out-performance in some names will simply stand out at you just like a sore thumb!
Going into this shortened week, we may see more bullish moves higher where the S&P tries to remain well above the 50 SMA (see below), and begin to make yearly highs as did its Nasdaq counterpart, but usually when things go too far too fast you can also expect a pullback. The main difference this time around is that on any pullback, I plan on BUYING some of the names I have my eye on. From a technical perspective and with the VIX being shattered (see below), we simply cannot be too bearish anymore.
If you were sitting on the sidelines waiting for the markets to give you a bullish signal, well here it is. If you get a reasonable pullback this week which would be healthy, it can potentially be a good time to add some bullish exposure.
If you remain a “perma-bear”, and listen to the news, focus on inflation, the economy, and “gloom and doom”, you just might miss one of the largest rallies you might see this year. When large institutions decide to get into the mix and enter certain parts of the market, a rising tide will usually lift most boats, unless there’s holes in the bottom!
With this shortened week ahead the one ‘heads up” I can give you is this: Unemployment data will still come out on Friday while markets are closed, this can potentially create a nasty “gap” next Monday morning in either direction.
Markets often like to inflict “max pain”, so a sell-off when nobody is paying attention and everyone else is Easter egg hunting sounds like the perfect spot to me, so adjust accordingly and let’s be careful out there!
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