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Tracking Tech and the Rotation Into Risk


If you are lucky enough to be holding a basket of Health Care stocks (XLV) that are up 20% so far this year, it is highly likely that you would be looking for ways to preserve those gains in the face of a market that's at all time highs and on track for a sixth consecutive month of gains. The same can be said for holders of the other defensive sectors too, as Consumer Staples (XLP), Utilities (XLU) and the Telecom sector have all outperformed the S&P 500 (^GSPC).

"That was sort of the main theme of the first quarter," says Jonathan Krinsky, chief technical market analyst at Miller, Tabak, in the attached video. "But as we head into the 2nd quarter, I think if we are going to see this rally continue, inevitably investors are going to lock in some profits on what has worked, and look for some areas that may be setting up for the next leg."

While this type of rotation, or pruning and replanting, is normal following a strong uptrend like the one we are currently experiencing, Krinsky says the list of laggards from which to chose is dominated by Materials (XLB) and Technology (XLK). And of these, he says the latter is the better choice.

"I think tech is an area that could see that rotation in the 2nd quarter," he says, pointing out that materials and commodities are under pressure now. He's also weary of a seasonal selling trend that dates back over 30 years.

"Since 1980, there has only been 2 years where we haven't seen at least a 4% correction begin by the first week of April," he says, noting its absence this year puts us in a pretty unique spot. While a 5% correction would not surprise him, Krinsky says he finds it "a bit concerning" that the Dow Industrials have continued to make new highs over the past few weeks, while the Dow Transports (which lead the way to record territory) have not.