Market Topping Out? Or A Rotation Out of Tech?

Three weeks ago, I wrote about money pouring into U.S. stocks, specifically technology stocks. Now, just three weeks later, the high-flying tech sector is writing a different story.

In fact, could we finally be staring at the beginning of a stock market correction that I’ve been talking about? 

Or is this just a simple matter of portfolio managers taking gains off the table and shifting assets around?

It’s a combination of both.

We are looking at the beginning of a larger stock market pullback AND starting to see a shift in market leadership.

First, let’s look at why the market could finally get the 8%-10% correction that I’ve been anticipating. As U.S. stocks sit at record highs, a measure from Citigroup — the Citi U.S. Economic Surprise Index — is sending a possible warning signal to the markets.

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As this chart clearly shows, you can see how Citi’s Surprise Index broadly tracked the S&P 500 Index for more than a year. Then the Surprise Index suddenly turned negative in early May. That means weaker economic growth could be in the cards, a negative for stocks.

Second, a leadership shift is underway. In fact, I expect a shift in sector performance as we head into the second half of the year.

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In particular, as popular technology stocks begin to break down ahead of the broader market indices, one sector appears to be benefiting the most from this shift: Healthcare, specifically biotechnology and pharmaceutical stocks.

Just, take a look at the chart below of the iShares Nasdaq Biotechnology ETF (IBB).

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As you can see, a breakout to the upside is underway. And it’s attracting a lot of investor attention.

The healthcare sector has gained 15% during 2017, making it the market’s second-strongest sector behind technology’s gain of 18%. Plus, over the last few weeks, healthcare has continued to rise while technology has lost ground.

In addition, when markets correct, defensive sectors like healthcare should outperform the other players.

So, if you don’t already have exposure to these subsectors, I recommend that you gain exposure by buying iShares Nasdaq Biotechnology Index Fund ETF (IBB) and SPDR S&P Pharmaceuticals ETF (XPH) on the next pullback.

Best wishes,

David Dutkewych