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Stage Is Set and Rotation Begun

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The Dow rebounded on Friday, keeping the index in the plus column for the year, but over the past week, it was unable to break the down-trend line of lower highs and lows. On the upside, the index needs to find a way to retest its all-time high. More than likely, that could be the scenario as we enter the big jobs report on Friday. Conversely, on the downside 17,800 needs to hold as support and if not, then 17,600.


It will need to reverse that trend to establish a strong buy signal. In the meantime, the miracle bond rally is beginning to stumble big time which could mean the economy is improving and the Great Rotation could finally happen. Of course this also means the Fed could be forced to hike rates sooner rather than later.

The Great Rotation would mean funds coming out of bonds into equities which has been long rumored, but never really materialized (even as major indices have rebounded more than 200% from their March 2009 lows). We're taking an amazing amount of money that even if it all doesn't seek domestic stocks, it would be a huge boost, more than offsetting money invested solely on Fed policy. This all being said, it’s premature to call an end to the bond rally as it was supposed to happen each of the last four or five years.

Following the Money

The market held where it had to and that's huge, but beneath the surface, it’s clear some rotation out of high flying sectors continue into also-rans and underperformers. These are notable sectors that brought up the rear last week. Note, while consumer stocks have been unimpressive, the 1.78% move in basic materials is substantially higher than the one year average- a possible huge buy-signal.


Last week's faster movers are clearly breaking out of the pace of the past year and sending clear buy signals.

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