‘Historic’ Market Rotation Starting: Trader Reveals Biggest Winners And Losers | David Nikoski

David Nikoski (0:00)

That means you have a 20% chance of picking the right name. Look at the 50 day on the right, and look at how fast those moves up, and then how they decayed extremely rapidly. Don't want to say that's going to happen, but that's a pattern that I think the biggest concern for me right now of looking at this market.

David Lin (0:18)

Pleased to welcome back to the show David Nikoski. He's a CIO at Vermilion Research. David, welcome back to the show. It's great to see you again.

David Nikoski (0:25)

Great to see you, David. Appreciate it.

David Lin (0:28)

Appreciate you having you coming back. People can check out a last interview with David, where we talked about his last views, links down below. So David, the Fed raised the Fed funds rate by 25 basis points this week. This was already well telegraphed though. Did you make any changes to your investment tactics, or let's say your short-term or your medium-term outlook based on this Fed decision alone? Or did you start to reallocate things tactically differently already before the Fed decision, given how well it's been telegraphed for weeks?

David Nikoski (0:59)

Yeah, one of the areas that we did make some tactical changes is in the financials. The financials are coming under pressure. When you start to compress the yield curve, that becomes a difficult situation for many financials. So you have seen the XLF, you know, BRETH deteriorate. You know, I posted on X, you know, the charts of Goldman Sachs, Morgan Stanley, JP Morgan, Bank of New York.

All of them are breaking up trends. It was an area where the market, you know, was looking for, you know, some degree of safety with growth. And you've seen that start to come unhinged and BRETH is deteriorating pretty remarkably fast in that sector.

David Lin (1:43)

Let's take a look at some of the charts that you sent me. Great charts, by the way. So, this is something that I want to bring up. Slide number, yeah, slide number two on the BRETH of the S&P 500

I want to stress and I want to just point out that in 2022, the Fed embarked on a massive 500 basis point tightening cycle. Now, we have to establish, one, if they're going to do the same thing again this time, and two, whether or not any tightening cycle will have the same material impact on the S&P as it did in 2022 So how would you go about establishing your thesis around those two questions?

David Nikoski (2:21)

Yeah, I think one rate hike right now is done and over with. Underneath the economy, despite the market hitting new highs, we have seen enormous amount of weakness. If you took the XLY chart and even the unweighted chart, you're going back to relative strength lows, you're going back to 2011 You wiped out 15 years of gains, period. We're talking significant underperformance, you're seeing that in staples. The bifurcation between sectors in the marketplace rivals that compared to.com. I don't go out and talk bubbles. You can get a lot of people grasping at that, but if you're wrong, that's not an opportunity for me to make a name for myself. But the parallels of how behavior is, is what I study in terms of relative strength.

So, one of the things that you see, transport's extremely weak, high energy prices, right? Very poor breath in it. You're seeing staples, you're seeing consumer discretionary. You know, two months ago, industrials were at the top of the list. They're close to breaking to a five year relative strength low.

The movements in this market in terms of, you know, shifting from one sector to another are absolutely historical and things that I don't typically see on a relative strength chart. But that's the market we're in. I don't get to, you know, make prognostications on anything more than two to three months at the rate we're going.

David Lin (4:08)

Let's take a look at this chart. Just explain the technicals here, and we'll talk about the fundamentals and the macro changes since August since you were last on. But just looking at the technicals on this chart, how would you trade it?

David Nikoski (4:21)

Yeah, well, you know, the S&P is in a critical area. You know, we did break down on the FOMC, you know, meeting through a level, which I would say is bearish. What's important about technical analysis and what I see more often than not in this market is you will break something intraday and reverse with a vengeance. It will not let you get a position or if you take it, it will wipe you out. So, you know, unless we took out that, you know, Wednesday low from the FOMC, you know, enclosed there, what I see this as a chart that I would say short, one of the problems that, you know, again, that you're seeing is the breath deterioration in the overall market is pretty significant.