Energy and small cap reversals
I'm taking a few days away to spend some socially-distanced time with family, so I'm including this premium note published this morning from Troy. Have a safe, healthy, and relaxing break! - Jason
A few months ago energy stocks were extremely hated. But with markets rotating towards companies that should recover when a vaccine is released, energy stocks (XLE) have jumped 45% in the past month alone!
That is quite the reversal in sentiment, with everyone jumping on board the sector rotation train all at once.
A record % of S&P 500 energy stocks are overbought (RSI > 70). Less extreme readings usually saw losses for the energy sector over the next 1-2 months:
Sector rotation towards small caps is just as powerful. More than a quarter of Russell 2000 stocks are overbought.
When this happened in the past, the Russell 2000's performance over the next few months was mixed.
For years value investors and small-cap investors hoped that their beloved factors would turn around. And for years they waited in dismay as growth & tech stocks continuously outperformed. That trend may be turning around, with the Russell 2000 / S&P 500 technology sector ratio surging at its fastest pace in 2 decades:
When small-cap stocks surged so quickly relative to tech stocks, the small-cap/tech ratio usually pulled back in the short term:
Similarly, the S&P 500 cyclicals/defensives ratio surged since March:
Sector outperformance doesn't last forever, and cyclicals typically underperformed defensives going forward: