Inside Markets — Rotation

Yesterday was the first obvious day of rotation out of high-beta equity groups into quality (earnings growth). The month-long outperformance in high beta/high short interest stocks largely came from retail investor flows. In bull markets, retail investors tend to chase high risk equity baskets following a positive macro print. In our view, the squeeze in high-risk segments was triggered by an unexpected rise in JOLTS job openings in late June (May data). And yesterday’s reversal/rotation may have been driven by a decline in JOLTS job openings (June data).  A stronger USD, which tightens financial conditions, should keep the rotation in place after high beta/short interest sentiment indicators reached 2021 meme stock (GME) extremes last week.

The squeeze in high beta/high short interest stocks may have obscured the near-term technical picture by giving the impression of broadening equity participation.  Our expectation for continued rotation out of high beta and into quality could result in narrow leadership once again.  Bull markets characterized by narrow leadership are generally considered unsustainable, which would better position equity markets for a pullback into a seasonally weak post-Labor Day period.