Megacaps Lag as Stocks Keep Rising. Has the Great Rotation Begun?

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Money is streaming into abandoned corners of the stock market as yearend approaches. Are investors finally shifting away from megacap growth names like Apple and Microsoft?

The S&P 500 rose 0.8 percent between Friday, November 24, and Friday, December 1. It was the fifth straight positive week, landing the index back near its high from the summer. But the real story might have been deeper beneath the surface.

Consider that long-term laggards like real estate and materials advanced the most. Of the six sectors that rose more than the S&P 500 last week, only one has outperformed on a year-to-date basis. (Consumer discretionary.) Communications and technology, the strongest this year, trailed the broader market.

Next, new and smaller stocks are breaking out. Over one-tenth of the S&P 500 made new 52-week highs on Friday (according to TradeStation data), but none of the major growth stocks were on the list. Instead there were members of the Dow Jones Industrial Average like Visa (V), Salesforce.com (CRM), International Business Machines (IBM) and UnitedHealth (UNH). (All of those stocks trade on the New York Stock Exchange and aren’t members of the Nasdaq-100.)

Third, Tesla (TSLA) was the only member of the “Magnificent 7” that outperformed the S&P 500 last week. (It rose 1.4 percent.) Meta Platforms (META) fell the most, down 4 percent.

Fourth, Cboe’s Volatility Index (VIX) remained near pre-coronavirus lows. That potential sign of risk appetite could make investors willing to own lesser-known stocks.

10-year Treasury yield index ($TNX.X), daily chart, showing historic levels.

Yields Fall Again

Several Federal Reserve officials spoke last week. Most avoided declaring an early victory against inflation. But other reports made the market think rates will fall.

The Institute for Supply Management’s manufacturing index remained lower than expected as employment and production slowed sharply. The Fed’s Beige Book survey of economic conditions also noted slower economic growth, including sluggish demand for transportation and weaker manufacturing outlooks.

Crude oil continued to fall despite OPEC+ members voluntarily cutting 2.2 million barrels of daily production. That could also keep a lid on inflation and support lower interest rates.

Biggest Gainers in the S&P 500 Last Week
Boston Properties (BXP)+18%
NetApp (NTAP)+17%
Salesforce.com (CRM)+16%
General Motors (GM)+15%
Crown Castle (CCI)+15%
Source: TradeStation data

As a result, the 10-year Treasury yield fell another 25 basis points to its lowest level in over three months. That helped pull mortgage rates down for a fifth straight week, according to Freddie Mac.

Small Cap Comeback?

The Russell 2000 small cap index rallied 3.1 percent last week. The Dow Jones Industrial Average followed with a 2.4 percent gain, while the Nasdaq-100 crept up just 0.1 percent.

Gold miners, banks, and industrial metals led the charge. Solar-energy stocks and homebuilders also climbed. All of those groups stand to potentially benefit from lower interest rates.

Two of the five biggest gainers were real-estate firms: office-building owner Boston Properties (BXP) and wireless-tower company Crown Castle (CCI). NetApp (NTAP) and CRM rallied on strong quarterly results. General Motors (GM) jumped after announcing a $10 billion share buyback.

Chinese stocks performed the worst as the country’s economy continued to struggle. Semiconductors, one of this year’s top groups, also lagged.

S&P 500, daily chart, with key levels and indicators.

Charting the Market

The S&P 500 remains slightly below the intraday peaks from the summer. However it ended Friday at its highest daily and weekly closing prices since the first quarter of last year.

The index briefly tested the September 1 high of 4541 and managed to remain above it. That may suggest old resistance has become new support.

Chart watchers may view the March 29, 2022, peak around 4637 as the next likely resistance.

The Week Ahead

This week brings important employment data and a few quarterly reports.

ISM’s service-sector index is due tomorrow.

Biggest Decliners in the S&P 500 Last Week
Cigna (CI)-6.5%
GE Healthcare Technologies (GEHC)-5.8%
Pfizer (PFE)-5.2%
Broadcom (AVGO)-5%
Arch Capital (ACGL)-4.6%
Source: TradeStation data

Wednesday features ADP’s private-sector payrolls report and crude-oil inventories.

Initial jobless claims are on Thursday, along with earnings from Broadcom (AVGO), Dollar General (DG) and Lululemon Athletica (LULU).

The biggest item is likely to be Labor Department’s monthly jobs report on Friday morning. It includes payroll changes, unemployment and wage data.

Next week is potentially more important, with inflation data and a Fed meeting.

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