How to Trade the Current Rotation and My Top Bio-Pharma Pick
The market's engine is still running, but we are hitting potholes. A look at liquidity trends, portfolio updates, and a biotech setup with multibagger potential.
The biggest development this week is the escalating conflict in Iran. First and foremost, I hope for a swift and peaceful resolution. While I’m not a geopolitical expert, from a market perspective, this will undoubtedly impact global oil supply chains and energy costs in the short term. We’ll soon see how the market digests this news and how the situation develops.
Photo by Amanshu Raikwar on Unsplash
Photo by Amanshu Raikwar on Unsplash
Pivoting to macroeconomics, we just got fresh data on M2 money supply growth for January 2026. The trend remains supportive, with total real monetary supply in the US continuing to grow at a moderate pace. (See the 5-year chart for real M2 below).
A highly effective way to read the money supply is to compare real M2 growth with real GDP growth. Using data from the FRED website, I track the rate of change (ROC) of this relationship (aka Marshallian K).
Why does this matter? Ideally, you want a number hovering around zero, which indicates the economy is getting exactly the amount of liquidity it needs to follow a “natural” cyclical path.
When there is excess money (a positive ROC), either the economy accelerates to absorb it, or that liquidity flows into financial assets, driving up prices. And vice versa.
So, where are we today? Have a look at the chart below.
Notice the massive decline in the ratio from 2021 through early 2023. Since then, we’ve seen a steady recovery back toward the zero line.
In a nutshell: The Fed slammed on the monetary accelerator during the pandemic, and then had to hit the brakes with the same aggressive force to bring inflation down. It worked.
Now, in the context of keeping prices stable, the Fed is bringing liquidity back to a normalized state. This normalization is exactly why financial conditions have been steadily improving over the last 24 months.
While this environment remains supportive of equities, it’s not the “easy mode” market we saw post-pandemic or in 2021, when risk assets went straight to the moon.
Today’s market is normalized from a liquidity standpoint. To find upside, we must look for companies that are actively improving earnings and margins, and ideally, aren’t overvalued.
AI and Tech, for example, might struggle here because their current valuations demand almost perfection (massive sales and earnings beats) just to justify their price tags. Consequently, the market is rotating, searching for upside in different sectors and outside the US.
INDEX AND SECTORS
S&P 500 Weekly (Through the Lens of Stage Analysis)
S&P 500 weekly (Stage Analysis lens)
1) Stage Call
Primary trend: Still in a Stage 2 (uptrend) because the price remains above a rising 30-week moving average (the green MA30 at roughly 6742).
Short-term condition: Sloppy and corrective. The price is below the 10-week MA (~6911) and has been chopping around near the highs.
Analogy: Think of it like an uptrend “engine” that is still running, but the car is hitting potholes.
2) Key Levels That Matter
Immediate resistance: The recent highs in the 7000–7020 zone (a psychological barrier and prior peak area).
First support (near-term): The 20-week MA at ~6842 (we closed at ~6879, just barely holding above it).
Line-in-the-sand support: The 30-week MA at ~6742. If the S&P 500 loses this rising 30-week MA and can’t reclaim it quickly, we transition into Stage 3, bringing Stage 4 risk into play.
3) What the “Tape” is Saying The market isn’t breaking down, but it’s certainly not acting like a clean, trending Stage 2 environment either.
4) Implications for the Next Few Weeks
Base case (most likely): Continued range-bound consolidation between roughly 6740 and 7020 as market leadership rotates.
Bullish tell: A push back above the 10-week MA, followed by a clean breakout to new highs with broad participation.
Bearish tell: A decisive break and close below the 30-week MA.
Sectors — what leadership looks like now
1) Leaders (Where the money is hiding/rotating): These areas look the most “buyable” provided individual charts set up correctly.
Energy (XLE): Strong across multiple timeframes (up ~26.7% over 6 months) and still screening as STRONG.
Industrials (XLI) & Materials (XLB): Showing solid medium-to-long-term performance and screening STRONG.
Defensive Strength: Consumer Staples (XLP) and Utilities (XLU) are up and screening STRONG. This is classic “late-cycle” or cautious market behavior.
2) Laggards (Where risk is highest):
Financials (XLF): Screening WEAK with poor medium/long-term performance.
Tech (XLK) & Comm Services (XLC): Showing WEAK signals with poor 1-month and 3-month profiles.
Consumer Cyclical (XLY): WEAK and negative over the 6-month window.
3) The Two Key Ratios:
Confidence Ratio (XLY/XLP): BEARISH. Cyclicals are lagging defensives, signaling the market is not in a “full risk-on” mood.
Risk Appetite Ratio (SPHB/SPLV): BULLISH. Looking at a longer window, High Beta vs. Low Beta ETFs suggest risk appetite hasn’t completely died, but it’s inconsistent. This perfectly matches the messy price action we’re seeing in the S&P 500.
Net Takeaway: This is a rotation market. We aren’t in a panic, but we aren’t on cruise control either. The S&P 500 is in a Stage 2, but it’s an unfriendly one defined by consolidation. The 6740 level is the line separating the bulls from caution. New buys should be concentrated in strong groups (Energy, Industrials, Materials), sized smaller, and executed with tight risk management.
PORTFOLIOS
10X Momentum Portfolio
No stop losses were triggered last week, though my stop for PSIX is getting uncomfortably close. I’m not touching it and letting the system work. We will likely see elevated volatility early this week tied to the news out of the Middle East, so it’s very possible I’ll get kicked out of that trade.
Below are my current holdings and the updated scorecard:
WT is behaving nicely, and INCY is in a position to weather next week's potential volatility, as healthcare stocks are generally less correlated to Middle Eastern geopolitical shocks.
While scanning this weekend, I found a lot of charts that look terrible—it’s simply not an easy market right now. However, one setup stood out to me:
