Yahoo Finance’s Myles Udland and Brian Sozzi break down today’s market action and outlook with Tony Dwyer, Canaccord Genuity Chief Market Strategist.

Video Transcript

MYLES UDLAND: Let's stay on the markets and talk a little bit about what one strategist calls, the rolling correction we've seen in the markets. Tony Dwyer joins us now, Chief Market Strategist at Canaccord Genuity. Tony, great to talk with you once again. So let's talk about this idea of the rolling correction, really indigestion underneath the surface I suppose of the market, while the overall indices continue to hit record highs. How are you thinking about this environment here as we kind of get the second half underway?

TONY DWYER: It's kind of amazing when you think about the gains that we've seen almost every day in the S&P and NASDAQ. But they're actually being driven by the same stocks. I think what's not really well known, is if you take those information technology stocks that were removed from the tech sector, so it would have been Netflix, Amazon, Facebook, and Google, if you put them back in the tech sector, it roughly is about 38% of the overall market, one sector. So I think that is having a dominant role in which direction the indices are going.

But Myles, when you look underneath the surface, for example yesterday in the NASDAQ, which everybody's focused on how great tech is doing, but in the NASDAQ composite index, only 34% of stocks, according to my Bloomberg data, only 34% of stocks within the NASDAQ are above their 50-day moving average, which is considered an intermediate term moving average. And only 48% of the S&P 500. So there's a lot of indigestion going on underneath the surface. The market is correcting. So it's kind of funny, Myles. People say, well, the market is doing this, and they're referring to the S&P 500. But I kind of look at the rest of the market and everything else, and it's just kind of, it's consolidating, correcting the gains from earlier in the year.

BRIAN SOZZI: Tony, how concerned, I mean, there's a lot of optimism in the market. You write about this extensively in your note. But how concerned should investors be about the inflation readings we've gotten this week? CPI yesterday pretty hot, PPI out today, pretty hot. Fed chief Jay Powell in his prepared remarks calling inflation gains notable. Yet the market continues to touch records.

TONY DWYER: Well, it's because the market believes that the Fed is going to taper eventually to try to keep ahead of the inflation readings. Frankly, I don't know if they'll be able to do it. A 7.3% year over year reading in the overall PPI today is pretty stunning, a stunning number. Yesterday's CPI as well. But remember, the Fed uses the core PCE, Personal Consumption Expenditure index, which is not having as big a bump up as the CPI. They've always told us exactly, people always ask, which one should you use? Well, you use when the Fed uses, which is the PCE, and that's a little bit more benign.

But I think it's a reflection of the belief that the Fed is going to try to stay ahead of the inflation curve, and confidence that it is, quote unquote, transitory. And I have no idea what that means in terms of time frame, but there is going to be some abatement of these inflationary pressures. For example, used car prices. The Manheim index is already showing that you've seen a peak in used car prices. So the ramp that is causing these spikes is going to abate a little bit.

MYLES UDLAND: You know, Tony, going back to the market, market's character right now let's say, you outlined the rally we've seen in tech stocks. I mean, the flip side of that is the major rotation into value, into growth. And look, the Russell got slammed yesterday. That has really come out of the market to some extent. Where do you see that trade in its life cycle? Because it was probably the only thing we have been talking about here three to six months ago.

TONY DWYER: I mean, this is the most unbelievable. Last July and August you were kind of considered insane to believe that the cyclical stocks were going to rally. That was when you were just getting the kind of monetary and fiscal stimulus that we've seen. Now going into March, we actually went, downgraded our rating of the financials on a relative basis, because interest rates and the economic recovery theme, which I have loved, from last summer until March, the interest in that had gone off the charts.

And when things get that overbought and that exponential on the move upside, it's already discounting it. So I think the move to 177 on the 10-year note yield, the rally that we saw in the, my quote is the banks and tanks, from the early part of the year, that discounted the kind of massive growth we're seeing now. Now what the weakness in those areas, especially on a relative basis, they have given back the financials and materials and industrials, even the energy, they've given back all of the relative performance going back even into last year, certainly since February.

[RINGING BELL]

So when you look at what that's discounting, is peak everything. Peak monetary policy, peak fiscal stimulus, peak growth in economy, peak growth in earnings. So this pullback in the economic recovery thing is very healthy. It's like what happened in 2004 and 2010, and I think as it continues for the next few weeks, it's going to set the stage for a nice year end opportunity.

BRIAN SOZZI: Maybe you saw the opening bell on Wall Street on this Wednesday morning. Ivy Brain Tumor Center is, in fact, ringing the bell, and they're doing it in honor of those who have impacted by brain cancer, in recognition of the research being done to help fight that disease. Tony, so the indigestion in the markets that you are seeing, you say it creates opportunity. Where is that opportunity?

TONY DWYER: It's creating opportunity. I want to be careful. I think that, I think there's still more to go. And again, by that, my plan has not been too bet on the downside. I've called it the summer of indigestion, but I've also called it the summer of do no harm. I don't think you want to be heavily negative or positive right now until we get a better indication of what the long end of the curve is going to do, what the Fed's policy is actually going to be, and what growth looks like once it's past peak.

Again, very similar to what happened after the initial recovery in 2004 and 2010, coming off of those bear market recession based lows. So there's, I don't think we need to reinvent the wheel here. As we get through this indigestion, which should last probably into early August, history shows and the data shows that want to be again, we're sector neutral now, but we, I've said very publicly, we'll be lagging into further weakness into that economic recovery theme, which means small cap, cyclical, emerging. Those area, commodities, those areas that benefit from economic activity.

MYLES UDLAND: And then, Tony, finally, I'm just curious, the speed with which this cycle has moved I think has created a lot of agita in markets. Has it been a challenge in talking to clients or even to colleagues to say, hey, we don't need to have a [AUDIO OUT] on the next month kind of as you're outlining here, because it's not normal for the cycle to go through as many machinations as it's gone through just in 15 months?

TONY DWYER: So many of the viewers can buy an S&P 500 index fund, and they've done phenomenally well. Phenomenally well over the last; up 100% since the low last year. Most institutional investors, most investors in general try to pick stocks and sectors. It's what they're paid to do. The frustration hasn't been the speed of the recovery in the markets, it's been the volatility in the sector rotation in the markets.

So for example, everybody last August was on one side of the boat. They were long the secular growth theme. Then fast forward to this March, everybody was on one side of the boat, the economic recovery theme. And the volatility underneath the sector moves is what's creating the angst in the investing buy side community. People that watch the markets, they pay attention to the S&P 500, they pay attention to NASDAQ, they're at new highs, it feels so exciting. But under the surface, most investors that I talk to, their guts are churning, which is why it's a summer of indigestion, because it's very hard to get a real theme, because of the rotation between growth and value under the surface.

MYLES UDLAND: And I'm sure a couple of trillion dollars in market cap reporting earnings in the next couple weeks, I'm sure that just feels great for everybody, that kind of news flow on top of this environment that we're talking about. All right, Tony Dwyer, Chief Market Strategist Canaccord Genuity. Tony, always great to get your thoughts. Thanks for jumping on, I know we'll talk soon.

TONY DWYER: Yeah, thanks, have a great day.