A Deeper Bench
The next leg needs sector rotation, not just superstar stocks
MVPs are the lifeblood of successful teams.
The Dodgers have Ohtani. The Yankees, Judge.
When these players are swinging, good things tend to happen for their respective teams. When they’re not, the opposite rings true - with a disproportionate amount of blame falling on those with the broadest shoulders (and beefiest salaries).
But what’s often forgotten in an age that values individual brilliance and celebrity, is that no matter how good the individual, its the supporting team around them that truly makes the difference when it comes to the crunch.
The movie Moneyball brings this truism to life.
Led by Brad Pitt’s Billy Beane, Oakland A’s built a roster around overlooked players who quietly got on base and kept the machine moving. And the results - well, no spoilers here, but it didn’t work out too bad in the end.
That’s what healthy markets tend to look like, too.
And in my view, the next leg higher in this bull run boils down to just that.
Not just semis swinging homers every week, but the bench stepping up to the plate and getting on base too.
Playing Conditions Look Good
Before taking a look at some of the benchwarmers primed and ready to take the field, a scout’s report on the current regime.
Risk models - which can now be accessed here, for free - remain in the all-clear zone, with credit spreads and volatility trading at the lower bounds of the range.
Breadth remains the primary concern here, with the percentage of S&P 500 stocks trading above their respective 50dema dropping to below 50% as of yesterday’s close.
Am I concerned about breadth in isolation? Not really.
Some will point to the slight deterioration over the last couple of weeks as a reason to tighten up. But I prefer viewing breadth as part of a wider composite and right now, most of the tickers I track within that framework are still giving the green light.
Until that changes, I’m willing to give the rotation thesis detailed below a chance to play out.
Benchwarmers Taking the Field
As detailed in last week’s post, I have little to no interest in chasing semis up here.
Instead, I’m scanning the market for those downtrodden areas that look primed and ready to breakout and keep the bull market swinging.
Top of the order, you guessed it…software.
Here’s a super quick view of IGV. Note the huge volume spikes at critical support, as well as price trending higher above the AVWAP from the prior lows, as well as the now upwardly-mobile 20DEMA and 50DEMA.
Dig beneath the surface of IGV and you’ll find MSFT. To me, this looks primed and ready for a major move. Above the diagonal purple line is what I’m looking for here, and feel comfortable holding calls above the AVWAP from the prior lows (green line).
Next up, healthcare. Specifically IHE.
Huge volume spikes and coiled moving averages, inject it baby!
Like software, this looks primed for a big move - and so long as price holds above the AVWAP from the prior highs, I’m happy siding with the bulls on this one.
My favorite name in this space, BMY.
Cup and handle. Inverted head and shoulders. I don’t care what you want to call it. To me this looks primed and ready to resolve higher from its multi-month base.
Last but by no means least, XLF.
Looks good to go, no?
Bulls get this thing cooking above that diagonal purple line and it’s game on.
JPM is my preferred vehicle for trading this thesis. Price holding above major support and the AVWAP from prior lows. Work to do to capture those key EMAs, but I’m happy holding until we see a decisive close below this week’s low.
Potential Curveball
For every team that wins the World Series, most never even get the chance to swing the bat.
Markets aren’t dissimilar in this regard. Even in strong bull runs, leadership narrows, rotations stall, and plenty of stocks get left stranded in the dugout (pour one out for your homies that own NKE).
Right now, the broader setup still looks capable of going the distance. The tape is constructive, key risk gauges remain supportive, and potential rotation under the surface is helping keep the playoff dream alive.
But this is no victory lap.
There are still more than a few pitchers warming up with curveballs capable of blowing up the bull thesis altogether - sticky inflation, rising yields, weakening breadth, geopolitical risk, and an increasingly crowded AI trade among them.
The game’s still on, no doubt.
But whether this run can go the distance relies on whether the bench step onto the field whilst the MVPs take a much-needed breather.
Best,
Alex