What's driving rotation out of growth into value stocks?

[00:00:00]Well, as investors grow concerned that chip stocks have become overvalued, the market has been going through a bit of a rotation lately. Joining us now to give us a technical analysis of the trend is Sid Mokhtari, chief market technician at CIBC Capital Markets. Great to have you join us. Good morning.

[00:00:17]>> Good morning, Lizzie. How are you?

[00:00:18]>> I'm great, thank you. So, I wonder what's driving this rotation you talk about right now, where you're seeing the rotation out of growth stocks, especially into the in the tech sector, into more value stocks. Where where are you seeing the drive there?

[00:00:33]>> Sure. I mean, it's a it's a narrative that we've been highlighting to investors and clients that we may be in the transitioning phase of a late cycle environment whereby we historically at least have seen better performance coming from, call it, dividend growers, yield exposure along with value, quality. And that's what we've been seeing slowly. And I think last month was a very pivotal month from a very notable shift that we saw from a from a, call it, quant style perspective and asset allocation perspective. So, I think, you know, the footprints of a value rotation have been marked by some measure, but we certainly saw that big, you know, rotational behavior last month.

[00:01:24]>> And you say the shift in the market is is rotational rather than distributional. I wonder what that tells you right now about the health of the market.

[00:01:33]>> Sure. I mean, it it effectively is saying that we're not fully exiting, you know, risk all together.

[00:01:41]You know, this is a market that is for now at least rather orderly able to shift itself out of per se growthier areas in that rotational fund flow out of, let's say, growth factors or growth-oriented sectors are being pulled into low vol dividend yield and by that I mean financials the net beneficiaries globally speaking insurance areas are showing very well.

[00:02:11]We see you know even parts of industrials along with transportation in the US biotech and health care which again tied to value buyers are also performing. So money is not really exiting equities and and even growth when we go through the sectors and individual names one at a time and we find them to be pausing and not necessarily breaking in a big way. So it is more of a rotational call it pattern not distributional at least for now and we'll see you know what happens post earnings.

[00:02:47]>> Okay, so those are some of the sectors you're seeing some strength in right now. What about sectors that you would advise staying away from right now because of the volatility we're seeing?

[00:02:56]>> Sure. I mean you know when it comes to volatility we're picking them up within the growth year areas spec as well as you know high debt areas along with no revenue if you will junkier small caps in the US perhaps as well as in Canada. We are you know we want to be very mindful as to what what the guidance may look like when earnings come through but we certainly know that investors are still rewarding financials are rewarding call it quality oligopoly compounders like the rails where there you know barriers to entries are high. So I think that's where investors should focus on in the course of the next you know few months and quarters.

[00:03:45]Highly advocate to look at quality as well as value with a backdrop of trend relative strength and momentum but certainly be be high grading if you can.

[00:03:55]>> Okay, I do want to get to your stock picks before we run out of time. Your first one that you like is Intact Financial right now. Tell us what opportunities you're seeing there.

[00:04:04]>> I mean, the stock is you know, was previously you know, under pressure for a while then we have seen a very strong move within the yield groups in the US as well as Canada. We generally like insurance and we think when you look at the you know, chart of Intact, there was a very strong base pattern developed between you know, from the early on the year. We saw a move break out above call it 270 to 80. I think any pullbacks within Intact is still a buy opportunity in our opinion given how the market is beginning to rotate in favor you know, in favor of insurance and the likes.

[00:04:42]>> Next up is Manulife. This company making some big news this morning. It's It says it's sealed a 5-year renewal agreement with Microsoft to expand its use of AI-enabled capabilities. So, big news for this company today. I wonder what you make of that and and why else you like Manulife right now.

[00:04:59]>> Bit of a laggard within our ranking order of quants and technicals in our models and we we we didn't lose any absolute readings within the stock and it's a stock that often shows up in our in our tables for long only clients and when we looked at Manulife versus Sun Life for instance, we like both stocks.

[00:05:19]We just found Manulife to be a cheaper relative name. We we chose Manulife for the month of for the month of July. Like I said, it's a name that regularly shows up in our models. But technically speaking, if you look at the stock, it break out of a you know, what what's often referred to as a you know, accumulation pattern or cup and handle which is a you know, uptrend continuation. The stock break out above $50 was a very um know, significant technical observation and we have seen follow through since. Um good trend, good momentum, good quant, um good fundamental story effectively as you mentioned. I think it's a stock to stay with and the the factor allocation does favor the likes of Manulife.

[00:06:02]>> National Bank is another one you like right now. I wonder if this is a preference for you out of some of the big major banks in Canada and and what else you like about National Bank?

[00:06:11]>> Um similar similar argument that can be made about the value um exposure. It actually has a very strong value ranking uh relative to other banks in Canada. Um good name um new highs um still you know globally banks and financials are showing very well. So there's a definite rotation that favors the space um and I think if we are in this kind of yield environment that we think we're in, um the likes of National should also benefit uh from that environment. We we favor financials in general still.

[00:06:43]>> And in the energy sector, you like Gibson Energy right now or at least that's one you want to highlight. Tell us what's your investment case there.

[00:06:51]>> A lot more oily if I may say so. Um it's a name that uh has showed um strong uh propensity on the upside um you know press pressing through what's called uh um you know uh top line resistance.

[00:07:03]Technically the stock has broken out of its range. Um you know the entire space midstream are showing quite well Keyera, PPL, uh Gibson. Gibson's the one that has been pausing uh for a for a before it can refresh technically speaking. Um um breakout looks good to us. Uh uh pullbacks are still opportunity. Every time it pulls back, it does get picked up at a higher low with a lot more um volume behind it. That's an accumulation uh sign for us. So I think we we do think stock has broken out of its upper band. It does have more upside run room.

[00:07:35]Um investors should look to energy as a value exposure bias, but Gibson is a good name that um hasn't fully resolved this measured move if if I could say that.

[00:07:45]>> Okay, we'll leave it there for now. Sid Mokhtari, chief market technician at CIBC Capital Markets, appreciate you joining us. Thank you.