The rotation of the stock market this month driven by a technical aspect

By | September 25, 2019

What occurred during the stock rotation “one decade earlier this month,” which stirred investors? What happened exactly? This could only have been a one-off technical step and not fundamentally based.

Suddenly last week there was a huge turning from momentum to value names. Many read the phenomenon as a warning sign that stocks of higher growth have been a catalyst for the market’s upswing over recent years. However, a sudden stop in tax loss harvest, some on Wall Street have said, could explain the revolution in momentum that seemed to decrease this week.

The idea is that investors often sell out lost stocks to decrease their tax burden as capital increases increase, a technical move that is essentially driven by a dynamic trade–chasing winners and losers. Such activity could have fallen substantially last week due to speculations that the Trump administration would adopt a bill to lower taxes on capital gains so that the incentive to send its losers would be reduced.

President Donald Trump proposed earlier this month to link capital gain taxes with inflation, thereby lowering taxes on selling assets that would pay investors on profits. On Sept. 11, he finally rejected such a plan. But last week’s discussion about this proposal coincided with a shock to many investors due to the change in stock leadership.

Tax losses collectors may not have sold losers and added winners in the prospect of lowering income taxes, which could reduce the benefit of tax losses. This could have caused the momentum to decline because stocks have fallen and names are being bought less.

On 11 September 2018, the iShares S&P 500 Value ETF reached its highest level with rotation hitting its peak.

Value, low-price cyclical companies, and book values tend to be economically sensible. However, it doesn’t make much sense for analysts to embrace the group without a substantial change in the economy.