Despite the recent spikes in market volatility – last week’s mayhem included – stocks weathered the storms quite well last month, continuing 2024’s trend of strong year-to-date performance across most sectors.
After another release of soft economic data rattled investor confidence, the S&P 500 dropped 4.3% last week to mark the index’s worst weekly performance since March 2023. But the blue-chip index was still up overall – gaining 2.3% in August to build on year-to-date gains of 18.4%.
Beneath the market’s surface, however, we’re continuing to see a great rotation in market leadership. As I’ve mentioned in prior issues, investors’ preferences are changing: Value is overtaking growth, small-caps are winning out over the large, and defensive and rate-sensitive sectors are taking priority over cyclicals.
In fact, you can see how things have changed in the table below. There’s a new trend in the market, and what used to be hot is now what’s not — the “Magnificent 7” are falling out of favor:
Since mid-July, when stocks stalled and volatility spiked higher, the seven have cooled off considerably: The mega-cap tech darlings are down 10.2%. Meanwhile, the other 493 stocks in the S&P 500 have picked up the slack – for an overall gain of 4.1%.
This is the textbook definition of market rotation. Money is flowing out of the former winners and taking a toll on their expensive valuations. And it’s flowing into other, cheaper sectors… and stocks with more upside potential.
Let’s take a closer look at what’s hot in the market now:
As you can see, I’ve highlighted the clear winners over the past one to three months. The hottest sectors of the rotation have been:
1. Interest rate-sensitive cyclical sectors — namely Financials and Real Estate,
2. and Defensive sectors – including Consumer Defensives (that’s Consumer Staples), Health Care, and Utilities.
These sectors have taken the lead from the Mag 7, leading the S&P 500 Index over both the past one-month and three-month periods. In fact, performance of financial stocks has been so strong that it’s leading the S&P 500 on a year-to-date basis as well – and by a growing margin, too. The same is true for staples and utilities, trailing just behind.
And although it’s not shown in the table above, it’s worth noting that dividend-paying stocks, as represented by the SPDR S&P Dividends ETF (SDY), have gained 10% since the start of July. That’s nearly three times the 3.4% move the full S&P 500 has made since then!
Financials are one of my favorite sectors right now to prospect for new buys. That’s because once financial stocks take the lead, they typically hold that lead for a while – and go on to post even bigger gains in the months that follow.
For example, the last two times financials lagged the overall market, in the periods from 2017-2018 and 2020-2021, they went on to play catch-up with a vengeance.
As you can see above, big profits are possible when financials take the lead in outperforming the market.
From 2017-2018, financials outperformed the S&P 500 by as much as 20 percentage points. And in 2021, financials soared 35% higher compared to the rest of the S&P.
With that in mind, I put together a TradeSmith screener with just a few simple filters to uncover high-quality financial stocks that also qualify for our TradeSmith Dividend Growers strategy. That way you can get paid current income while you wait for more upside.
You can access the Screener from your TradeSmith Finance dashboard, by clicking Invest, then selecting the Screener tab.
Here’s a screenshot of the filters I used…
Just a handful of filters is all it takes:
- TradeSmith Strategies: Dividend Growers
- Sectors: Financials
- Business Quality Score: more than 50 — that is the top half of financial stocks by quality
Finally, I sorted results by the Trailing Dividend Yield, listed in descending order. This way, stocks with bigger dividend payouts rise to the top. I got 21 results on this simple screen — the top 10 are below:
Keep in mind that you can tighten or relax some of these filters to get more or fewer results. Also, consider adding other filters to the screener before saving it, to make it your own.
For instance, high Money Movers Score, bullish Cycle Turn Area or bullish Seasonality patterns could enhance your results even further.
PLEASE NOTE: Certain filters are available through various subscription levels, and I have access to all of them with my TradeSmith Platinum membership. If you’re not seeing some of these filters on your TradeSmith Finance platform and would like to, feel free to call us at 888-623-0858.
Mike Burnick’s Bottom Line: Stock market leadership is changing. Interest rate-sensitive sectors like Financials are now leading the uptrend with Fed interest rate cuts on the horizon. Defensive sectors are also attracting money flows with market volatility on the rise — and by spotting these trends early, you can cash in on them using TradeSmith tools to uncover potential winning stocks.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith
P.S. I’m not the only one keeping my eyes on shifts in the market. My colleague Luke Lango, the Senior Investment Analyst at our corporate partner InvestorPlace, has identified a rare economic event that historically triggers a stock market boom.
It’s occurred three times in the past 30 years – in 1995, 1998, and 2019 – sparking market surges each time. And Luke’s been keen to talk about it: we could see another of these events this month.
Luke is hosting an urgent briefing tomorrow, on Wednesday, September 11, at 8 p.m. ET to help people prepare for this rare event. Despite the market’s slow start to September, he believes this event will trigger several stock breakouts – and he’s selected three trades primed to make significant moves.
You can click here to automatically reserve your spot for Luke’s briefing – and learn why he thinks there’s another market boom right on the horizon.