Mark Newton, Fundstrat’s head of technical strategy, says investors looking to diversify their holdings could consider two beaten-down sectors that are flashing signs of life.
The News
In a new Yahoo! Finance interview, Newton calls the strong rally in semiconductor names in the last month “unsustainable,” while noting that the pace of buying is starting to show signs of weakness.
“When I look technically at the charts of the semiconductors being up over 40% in the last month, it’s really unsustainable, regardless of what the overall long-term outlook is of many of these companies, which are all changing the world for the better. They’ve gotten overbought. I would argue they’re not necessarily overvalued. They’re still quite cheap. But portfolio managers are really reticent to chase strength when it gets so overdone. And you can see that, technically. They’re gradually starting to wane in momentum. And it might not seem that way.”
Newton says investors who want to lock in gains from semiconductor names can rotate their capital into consumer discretionary stocks that are starting to participate in the market advance.
“I would say the weakness over the last year has probably been a bit surprising, at least from my perspective. When you see stocks like Nike that have really been hard hit for various reasons, Target, Best Buy, Home Depot, and markets hitting new all-time highs, these stocks just weren’t participating. So now that’s slowly but surely starting to change. And it happened literally in the last week and a half. So it hasn’t been something that’s been fundamentally driven.”
The market strategist also predicts that crude oil will start falling in the coming weeks, highlighting that one sector would be the primary beneficiary of declining prices.
“A lot of it’s just algo-based and crude turning down. We’re seeing better strength out of the airlines, which is the biggest beneficiary of a drop in crude hitting the highest level in months. That’s a very good sign for people looking for alternatives to ‘Where do I put these Micron and Seagate Technology stocks, which are getting a bit overbought potentially?’
If you wish to diversify, there are other areas now that are actually pretty interesting and are starting to stabilize and rally from pretty severe oversold levels.”
What It Means for Investors
While most analysts would always recommend letting winners run, Newton appears to be pointing to where the smart money is heading. Looking specifically at Nike (NKE), the stock is flashing a bullish divergence on the relative strength index (RSI) on the weekly chart while hovering at oversold levels.
A bullish divergence indicates that buying momentum is rising despite falling prices. Traders see bullish divergence as a solid signal that a rally is in sight.
Since 2022, Nike has flashed a bullish divergence signal two other times, and on those occasions, the stock rallied more than 50% from the bottom.
Meanwhile, Delta Air Lines (DAL) has broken out to new all-time highs after testing resistance at $75 for months.
Turning to Micron (MU), the stock continues to rise, but it is flashing a bearish divergence on the daily chart, suggesting that buying momentum is waning. In technical analysis, a bearish divergence is just a warning sign and does not necessarily mean a correction is in sight.
All in all, price action and momentum data appear to support Newton’s stance that a potential capital rotation may be underway from semiconductors into consumer discretionary and airlines.
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