Rotation into defensive tech for lower rates is a bit overdone

Stuka II joined discussion · Jul 7, 2021 16:02

Rotation into defensive tech for lower rates is a bit overdone

On Tuesday, the flow action started the session off sloppy with selective defensive tech names seeking bullish positioning, while inflation and reopening plays were littered with protection.

Flow cleaned itself up through the mid-session once morning put buying dried up and intraday sentiment flashed some green rates continue to head lower and dominate the tape with aggressive rotation into deflationary issues. First, it was the underbelly of growth that got this rotation started and now the scramble has been focused on the likes of $Apple (AAPL.US)$ $NVIDIA (NVDA.US)$ $Amazon (AMZN.US)$, some of which have lagged the early stages of this move.

On the sentiment front

S&P sectors' sentiment

Intraday sentiment saw a nice rinse, no immediate reaction in the indices with all the rotation going on but once VIX ran out of gas, the indices started their bounce. Short-term sentiment also pulled away from the sell signal, even after a strong intraday bounce and the Nasdaq finished in the green, Tech finally flashing some heat in sector sentiment.

A pretty messy backdrop out there, we are just coming off some short-term sentiment heat off Friday's rally and rates melting away have everybody scratching their heads wondering what is going on.

Rotation into defensive tech for lower rates is a bit overdone on a short-term basis but considering how offsides players were caught if rates continue lower, this rotation can certainly overshoot.

Players weren't positioned for rates staying down, let alone heading in the complete other direction. It doesn't mean there isn't any risk now in these names, cause there certainly is as they continue to push higher. And with earnings just a week away in all the groups that are being sold right now, like the banks and materials, it makes for a really tricky spot here.

To sum up

For now, everything could be technically traded over the institutional sweep buying into any weakness but the risk-reward is just not too appealing.

Underbelly growth, which has the first to attract sweep buying and lead this aggressive rotation initially, has started to digest recent gains off many upside exhaustion signals last week. That could be a place they look to go back to, once the current momentum dries up a bit in FAANG and if rates continue to remain soft.

We do have the FOMC minutes today as a potential catalyst but it could also be a catalyst for a bounce in rates and related plays. Keep an eye on institutional sweepers for now for clues but earnings positioning is going to start to become an issue as it always does. As mentioned above, a really tricky spot here, and it is a good time to be selective, play tight with a short leash until we gather some further intel.
Notable bettings toward individual names