Morgan Stanley chief investment officer Mike Wilson says investors should keep a close watch on three sectors that could emerge as the next market leaders following the explosion of semiconductor names.
The News
In a new Bloomberg interview, Wilson says many semiconductor names have been seeing rising earnings estimates from analysts but have now reached unsustainable levels of 70%.
Wilson also notes that the semiconductor names could witness a leverage flush as traders crowd into high-flying names.
“Semiconductor revision breadth got to 70%. This only happened three or four times in the last 25 years. The S&P 500 revision breadth is close to 30%, also very, very high. It’s going to roll over, and last week, [a couple of companies reported] in the semiconductor industry. They were fine. But the revision breadth started to roll over. So it’s a second derivative. And then there’s leverage in the system in that trade, and that sort of starting to unwind a bit. To me, there’s going to be a transition now to some new leadership.”
According to Wilson, he’s seeing signs that investors are rotating into other sectors of the market.
“The key is, is there a place to rotate to that the market can kind of hold in? We think there is, and we’ve highlighted the consumer [sector] and some of the other industrial areas like transportation stocks and even the regional banks.”
What It Means for Investors
If Wilson is correct that a rotation is underway, savvy investors tend to play it by looking for market leaders or the “fastest horses” in each sector.
From a technical perspective, both M&T Bank (MTB) and Citizens Financial (CFG) appear to be gearing up to break out into new all-time highs. Average investors tend to shy away from accumulating a stock printing new all-time highs because it’s expensive. But historically, these stocks tend to witness strong bullish momentum and price spikes because no known price level could limit upside gains.
Starting with MTB, the key level to watch is $238.
For CFG, it’s the resistance at $65.
Looking at the consumer sector, TJX (TJX) appears to be a clear leader after printing a new all-time high at $167. Its relative strength index, a momentum indicator, is also hovering above 70, suggesting strong buying momentum.
In transportation, Delta Air Lines (DAL) is a solid example of what happens when a stock rallies to fresh all-time highs. For now, DAL may be consolidating after surging by over 21% in May following an all-time high breakout.
If Wilson’s rotation thesis plays out as expected, the next leg of the bull market may have less to do with chips and more to do with the everyday businesses that power the American economy, and the charts suggest the move may already be underway.
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