Rotation starting? Goldman Sachs: In the past 17 days, the "Seven Sisters" of the US stock market have been sold off for 15 days.

In the past week, value stocks and small-cap stocks in the US stock market have surged, while the "Big Seven" have struggled. Is the market shifting and rotating?

Since the beginning of this year, boosted by AI and expectations of interest rate cuts, the S&P 500 index has entered a bull market, with the "Big Seven" (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta) accounting for over 20% of the index's weight, becoming the "pillar" of the US stock market's surge. Without the "Big Seven," the S&P 500's gain would have been only 8% instead of the current 19%.

However, the wind has started to change recently, and the "Big Seven" in the US stock market have fallen out of favor, with 15 out of the past 17 trading days seeing net selling. On the other hand, small-cap stocks and value stocks have been favored, with small-cap stocks showing a clear "size premium."

As the market bets on an economic recession and expects the Federal Reserve to quickly cut interest rates, will small-cap stocks and value stocks shine? How long can the "Big Seven" in the US stock market maintain their strength?

Are the "Big Seven" losing upward momentum in the US stock market?

In his latest market commentary, Goldman Sachs trader Michael Washington pointed out that the "Big Seven" are falling out of favor, with 15 out of the past 17 days seeing selling pressure, and both long traders and hedge funds have been net sellers recently.

The overnight trend reflects the recent adjustment in the overall market. The Nasdaq 100 (tracking technology stocks) outperformed the Russell 2000 index (tracking small-cap stocks), mainly due to the surge in Apple's stock price. After the weakness in large-cap stocks yesterday, there was some passive buying demand, and the "Big Seven" were also actively repurchasing.

However, despite some moderate buying pressure on the "Big Seven," aggressive selling pressure has continued recently. Goldman Sachs' overall execution flow selling bias is -263bps, compared to an average of -78bps over the past 30 days. Long traders and hedge funds have selling biases of -8% and -2.8%, respectively.

Market participants have started to shift their focus from the "Big Seven" to other stocks, as these seven large technology stocks have significantly underperformed the broader market in the past two weeks. Although there was some moderate buying pressure yesterday, Goldman Sachs pointed out:

Hedge funds have actively reduced their positions in mega-cap technology stocks, with 15 out of the past 17 trading days seeing net selling, mostly driven by long sellers.

It is worth noting that as of now this year, the overall cumulative net trading volume of the "Big Seven" in the US stock market is roughly flat compared to the beginning of the year, after experiencing net buying of over 50% in August.

In addition, the latest data shows that the proportion of the "Seven Sisters" in the Prime account of the US stock market has dropped from the previous peak level (about 20%) to 17.6%. However, relative to the performance of the past five years, it is still at a relatively high level, ranking in the 91st percentile.

Will small-cap and value stocks shine?

The performance of the "Seven Sisters" in the US stock market has fallen out of favor, while small-cap and value stocks are favored.

According to media reports, analysis indicates that recent economic data shows a slowdown in the US economy, which is usually a buying signal for small-cap stocks. Historically, in the three economic recessions of the 1970s and 1980s, small-cap stocks outperformed large-cap stocks.

At the same time, small-cap stocks have a "size premium" - that is, small-cap stocks tend to provide additional returns without additional risk over the long term. This theory suggests that the market undervalues the value of lesser-known and less attention-receiving companies. In the past decade, despite the increasing concentration of the S&P 500 index market value in the top technology giants, small-cap stocks have significantly underperformed large-cap stocks.

An academic paper on SSRN points out that as market concentration increases, the size premium will also increase. However, the research also shows that due to so much market value being concentrated in these seven stocks, the benefits of investing in small-cap stocks are greatly discounted when specific investments of some of these companies generate returns. So far, this factor has often been weaker than the small-cap effect, but that doesn't mean it will always be the case.