Was yesterday a bad omen?

Was yesterday a bad omen?

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What just happened?

Yesterday, growth stocks got slaughtered.

We saw aggressive selling in everything from liquid leaders to high-flying speculative stocks.

Traders like myself took notice.

Growth stocks are among the most important stocks in the entire market. They often include the market’s top performers. They also tell us a ton about “risk appetite.”

So, was yesterday’s growth stock bloodbath a bad omen for the broader market? We’ll answer that question in a minute. 

But let’s first look at what ELSE happened yesterday… 

Big money poured into other areas of the market. 

The homebuilders ETF (XHB) finished the day up 4.2% -- on the highest daily volume in two years. The retail ETF (XRT) jumped 3% on heavy volume. And the solar ETF (TAN) climbed 2.8%. 

In other words, capital went from the strongest stocks to underperforming groups. This is what we call “rotation.” It’s perfectly normal during bull markets. In fact, it’s essential. 

The areas I mentioned are also all “rate sensitive” groups. So, the market may be pricing in a rate cut from the Federal Reserve. 

If that happens, all stocks should benefit in the near term, including stocks. 

But that’s not the only reason I’m NOT sweating yesterday’s growth stock beat down.

Tuesday was also the first trading day of the third quarter. 

So, there’s good reason to believe what happened yesterday was simply rebalancing. This is when hedge funds and other financial institutions make big changes to their portfolios. 

So, it’s very possible that some of Wall Street’s heavy hitters took profits in their top performers, i.e. growth stocks, and put money to work in less extended stocks. 

In short: I'm not expecting a big pullback. But there’s no need to get aggressive here.

Justin Spittler
Chief Trader, RiskHedge

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