July 9^th …the day everything flip-flopped! At least, for now…

During the past 30 days or so we have experienced one of the biggest rotations in market leadership ever in a such a short period of time. This is when the stocks that had been performing well, the winners that are leading the market higher, suddenly turn into the biggest losers while at the same time those that had been the losers suddenly turn into winners…a flip-flop in leadership.

Nasdaq was leading and Russell was lagging

Source:YCharts. Price only (does not include dividends).

As the above graph shows, the Nasdaq Composite, an index of many technology stocks and more, was leading the market gaining nearly +23% year-to-date through July 9th while the Russell 2000, an index of smaller U.S. stocks, was essentially unchanged during the same time. Then they flip-flopped.

Leadership flip-flopped

Source:YCharts

As the above graph shows, in just 15 trading days, from July 9th to the 30th, the Russell 2000 surged more than +10% while the Nasdaq Composite decline -7%...a difference of 17.5%. This is a classic example of a flip-flop in market leadership, flip-flops that occur somewhat regularly but seldom by this magnitude in such a short period of time.

S&P 500 stocks did the same

Source:YCharts data utilizing Patton’s proprietary software.

This same performance behavior can be seen among the 500 stocks in the S&P 500. The 10 BEST performing stocks in the S&P 500 through July 9th (see above table) had an average gain of a staggering +94.2%. Then during the next 15 days they declined an average of -18.1%. On the opposite end, the 10 WORST performing S&P 500 stocks year-to-date through July 9th (see below table) were down -37.3% then reversed and gained an average of +7.3% the next 15 days. All of this demonstrates the significant reversal in performance throughout much of the markets.

Source:YCharts data utilizing Patton’s proprietary software.

Historic comparison

The only time we have seen the Nasdaq Composite and Russell 2000 diverge by such a wide margin in a short period of time was at the end of 2000…the performance difference then was 18.9% (compared to 17.5% this July). This was in the midst of the very rough 2000 – 2002 bear market, often called the “Tech Wreck”, when the Nasdaq Composite fell -78% from top to bottom while the Russell suffered as well but only lost -45%.

I am NOT suggesting the Nasdaq is going to fall sharply from here or that the Russell will continue to outperform…I simply have no way of knowing and predictions are of no value. That said, given that the Nasdaq surged prior to the 2000 – 2002 Tech Wreck and has surged again in recent years, including 2024 leading up to the July 9th reversal, it all makes for interesting comparisons.

Source:YCharts; price only (not including dividends). THEN is 3/9/1995 – 3/9/2000. NOW is 7/9/2019 – 7/9/2024.

As you can see in the table above, prior to the 2000 Tech Wreck (“THEN” in table above) the Nasdaq surged 534% in the 5 years running up to the peak. This gain was 3.9 times the Russell 2000’s 138% gain. This time around (“NOW” in table above) the Nasdaq rallied 126% in the 5 years prior to the recent July 9th peak. Although a much smaller 5-year run than prior to the Tech Wreck it was still 4.2 times the gain the Russell 2000 has had. As is often the case with such comparisons, there are some similarities and some difference…interesting but I’m not sure it tells us much about the future!

What’s it all mean?

The market behavior tells us one thing for certain… investor sentiment shifted and did so quickly. One day investors love one group of stocks and the next day they do not. There are various explanation as to why this happened (increase risk of a recession, valuations got extreme, etc.) but there’s no way to know exactly what causes such behavior.

Often reversals in leadership are short-lived and investor sentiment shifts back to the way it was. Other times, though, the shift in sentiment can persists for an extended period of time. Unfortunately, based on all of the research I did, I cannot find any particular pattern.

The great news for clients in our Super-Diversified Portfolios is that all of this market whipsawing had a negligible impact on performance. This market behavior is a perfect example of why we stay diversified and stay the course. My confidence is unwavering that this is the best path to long-term investment success!

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