Why Rotation?

Supply and Demand.  The dynamic expressed by this phrase is the cornerstone of Capitalism:  In fact, this concept drives most of the things that we experience in life and is not confined just to issues of money.  But for our purposes, the supply demand dynamic is played out daily in the public stock markets and those that can discern the trends of supply and demand can do quite well by charting their ebbs and flows.

In my last commentary, we touched on the probability of a market correction, but also noted the rotation of market issuers.  Let’s disregard for a moment the clues that technical charts convey to those able to follow their message.  If we focus only on the very big picture of supply and demand, we can clearly see the effects that people’s patterns of consumption have on investment ideas.

The dominant story affecting market activity over the past year has been the lockdowns imposed upon people in most every nation.  As a consequence of people being forced to stay homebound, business catering to this dynamic experienced tremendous growth.  Amazon, Netflix, Home Depot, Lowes, Wayfair, Zoom, Etsy, Shopify and other ‘nesting’ companies did very well because of people’s imposed focus on home and hearth. Peloton was a huge investment hit due to the necessity for fitness among the yuppie set. Peloton was a brilliant melding of social networking and the need for fitness. Small pharma companies sprouted to take advantage of the sudden urgency to produce vaccines. Cannabis companies staged a comeback and therefore of course, snack companies did as well.

As we mark the anniversary of the start of last year’s upheaval, the dynamics of supply and demand continues to change and that is foretold by market action.  We notice that the demand engendered by online retailers has pushed up prices in many basic commodity prices essential in the manufacturing of the goods supplied by such retailers including the afore-noted copper and lumber.  Companies such as Caterpillar are important in extracting raw materials.  As we appear to be near the end of the tunnel for government imposed lockdowns, there are anticipatory price movements in airline stocks, in hotels, in cruise companies.  I expect that once the final shackles are loosened, the next big American pursuit may be road trips and we can see some of that as companies such as Winnebago rise to new highs. Even Ford and General Motors have achieved recent highs. There is lots of pent up demand after a year of hibernation.

It’s not necessarily the case that heretofore strong stocks will fall; but it is likely that stocks next on the economic rotation cycle will assume leadership over the period of the next year or longer.  If we look only at a few components of the Dow Jones, companies such as 3M and Honeywell stand out as clearly under accumulation and will likely continue their uptrends for a while to come. The same goes for energy stocks, notwithstanding the clamor for alternate fuel companies.  This will have implications for other economically sensitive and in particular commodity stocks as the business cycle rolls forward.  

It’s evident that inflation scenarios are beginning to emerge based on the activity in the CRB index. 

While this index has not made new highs, it appears to be turning a corner to the upside. In summary, having a big picture perspective on events will help to focus on investment trends with technical tools confirming those views.

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