There has been a very significant change in the markets in the last few weeks. It is a transformation happening just below the surface that is masked by the movement in the major indexes. As a result, the shift has been shrouded and has many traders fooled into more wash, rinse, repeat of trying to grab the dips. But this is a tectonic event that could be both extremely lucrative and also catastrophic for traders.

It is based on two major developments that are interconnected. Breadth and rotation. If you understand them, there is a big payout opportunity, if you don’t–trading becomes extremely risky.

Where The Money Is

For quite a while, about 10-12 stocks have made up about 80% of the ongoing rally we have seen taking place for months. Joe Duffy did an excellent job of covering this in his article where he noticed it starting to change. This kind of shift can go unnoticed as most of the headlines we see focus on the major indexes and, specifically, the weighted versions of those indexes. in a nutshell, the bigger the company is, the more its movements is factored into the index you see across the bottom of the news screen. A minor jump in Microsoft will have a bigger impact on the index than a jump in Caesar’s Entertainment. What has been happening is the big players in the indexes, like the Mag 7, are experiencing great rallies and a much larger number of companies were not participating in that upside at the same rate. When we read the headlines of new highs for the S&P and NASDAQ it sounded like everyone was winning.

But things are changing, and again, it is not so clear in the indexes. The big headline darlings are slowing down and seeing downward pressure, but it looks like the same rally is continuing.

As the higher number of smaller companies start to see some of this rally momentum the money the see coming in is coming out of those small handful of giants. Here’s the question, are we truly seeing all of the stocks in the index participate or is it that the smaller companies are the last cars on the roller coaster just reaching the top of the hill?

Where The Money is Going

As we see money moving out of the heavily weighted stocks in the indexes, the next question is where is it going? Keith Harwood highlighted his thoughts on this in his quick video chat the other day and it helped him find a very sweet trade. And Joe Duffy spotted money flowing into biotech like a firehose and used that to lock in some really nice trades.

When a couple stocks in a sector start to see a windfall like this many times the others in that same sector will start to play catch up. Some traders will sort through the sector for the individual laggards and others will grab the sector ETF and set up a position with that trading tool.

Any way you choose, the important thing is to be mindful that the market is clearly in transformation and it is time to be cautious about getting pulled in by headlines and taking unnecessary risk.

Keep learning and trade wisely,

John Boyer

Editor

Market Wealth Daily