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Could Sector Rotation Be The Reason For AMD's Recent Weakness?

Wayne Duggan

Some of the most popular tech stocks in the market have performed relatively poorly so far this week. Without major news driving the tech sector lower, some of the stocks may simply be the victim of sector rotation.

Strange Trading Action

So far this week, Amazon.com, Inc. (NASDAQ: AMZN) stock is down 2.8 percent, Advanced Micro Devices, Inc. (NASDAQ: AMD) stock is down 4.3 percent and Square Inc (NYSE: SQ) stock is down 7.3 percent.

At the same time, Bank of America Corp (NYSE: BAC) is up 1.8 percent, JPMorgan Chase & Co. (NYSE: JPM) is up 3.3 percent and Citigroup Inc (NYSE: C) is up 4 percent.

While the SPDR S&P 500 ETF Trust (NYSE: SPY) is up just 0.1 percent so far this week, the Technology Select Sector SPDR Fund (NYSE: XLK) is down 1.1 percent and the Financial Select Sector SPDR Fund (NYSE: XLF) is up 1.7 percent.

These trends are indicative of a phenomenon known as sector rotation. Sector rotation is an active investment strategy in which traders transition from one sector to another in an attempt to outperform the overall market.

The returns of the SPDR ETFs mentioned above suggest traders who have rotated out of tech stocks and into financial stocks this week have certainly outperformed the S&P 500.

Tech Stock Burnout?

Although a half a week of data is nothing more than anecdotal, there is plenty of longer-term evidence suggesting a potential rotation out of the tech sector at some point. Year-to-date, the XLK ETF has gained 15.7 percent overall, while the XLF ETF has lagged with just a 2.8-percent return. In fact, going back five years, the XLK’s 125-percent gain is nearly double the 68-percent gain from the financial sector ETF.

Tech stocks have led the way throughout the nearly decade-long bull market. But the recent sell-off in tech stocks may be less of a sign that the bull market is ending and potentially more of a sign that traders are rotating into other sectors of the market.

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