The Rotation Play
In baseball, there is a “rotation play” designed to thwart one of the very basic plays in our national pastime, the much overlooked sacrifice bunt. It is a defensive strategy that can work if the batter makes a mistake. In water polo, teams often employ a “rotation”, an offensive strategy of continuous movement that works when you are in better shape than your opposition. In basketball, the rotation play is also an offensive strategy which coaches love, and they each like to develop their own twists. Basically, on the court, a rotation offense has two rotations taking place simultaneously – one down low under the basket and one up top around the perimeter. Thinking about it is enough to make you dizzy.
The investment markets have their own version of a rotation play, and it appears to this observer that we may be starting a traditional stock market “rotation”, a movement from winning names to other names. If you are following the markets of late, there have been a very select number of big winners and a lot of companies sort of holding their place. Some industries and companies hit hard by the pandemic are deeply depressed. At this time (midJuly), after a long run-up in some of the glamour names, I think we see a market shift from the big winners to the “holding their own” names. I would like to offer specific examples but I can’t do that in my blog. You know, rules are rules.
Raymond James used to have a market commentator that prided himself on calling “the rotation”. In general, he was pretty accurate and it was helpful. I don’t know what he would say about our current environment (he’s retired), but I am sure he would say it with some bravado and let everyone know when he was right. But my bet is that he would be announcing on some news show that “the market is undergoing a classic rotation”.
My “rotation call” comes with less bravado, and some other guidance of a more practical nature. For instance: what should you do as you see the rotation unfolding? Very simply, if you have large winners in your portfolio, one might consider selling a portion and locking in some gains. I would not generally advise to liquidate the whole position, however. Look to replace winners with quality, not speculative names. If the market is not in a rotation but giving a head fake and starts to turn down, you will want to own quality. This type of action is considered “portfolio upgrading”. This makes sense for most people.
Another suggestion would be to avoid the deeply distressed names even if they have traditionally been higher quality. The market is most often pretty darn accurate in predicting significant changes within an industry or at specific companies that are widely followed. Trying to outsmart the collective wisdom can be frustrating and lead to subpar returns. On this subject, I am speaking from years of experience and I hope you will listen. Enough said on that matter.
Finally, recognize that a rotation is neither an offensive nor a defensive strategy for investors.
Rather, it is simply a stage in the market cycle that often occurs.
There is no playbook for the stock market like the playbook for baseball or basketball. You need to recognize that trading to “play the rotation” has costs, and possibly tax consequences, so it may not be right for you.
I would be happy to discuss this subject with you in greater detail. Feel free to drop me a line, or shoot me an email. We can talk investing or sports. Boy, I really miss baseball.
Ralph McDevitt July 15, 2020
Senior Vice President, Investments
Any opinions are those of Ralph McDevitt and not necessarily those of Raymond James.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance does not guarantee future results. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.
