Bearish Indications from Sector Rotation. Recession?

Jan 15, 2008: 10:32 AM CST

The Sector Rotation Theory is again showing majorly bearish money flow patterns into the most defensive sectors possible.

The Utilities, which offer attractive dividends and who also perform well in conditions of falling interest rates, have increased 15% in the last 65 days as the market has turned bearish. Utilities greatly outperforms all other of the nine major US Stock Market sectors.

There is a three-way tie (which sounds similar to the US Presidential Primaries) for second in the Energy, Consumer Staples, and Healthcare sectors.

Rising Energy (oil, gas, etc) prices are bearish because they serve as a virtual tax on businesses and consumers.

Rising Consumer Staples stocks are bearish because large funds and traders are moving their money into the security that these stocks provide. Even in recessions, we must still buy toothpaste, food, tobacco (for those who do), home cleaning supplies, etc. When Consumer Staples (up 9.58%) significantly outperform Consumer Discretionary (down 9.35%), this is an extremely bearish omen. Consumer Discretionary stocks include gaming, hotels, luxury goods, travel, automobiles, etc. The idea is that, in bad times, we can reduce spending on these items while we cannot do so on necessities.

According to one view of the Sector Rotation Model, where are we in the current rotation of funds?


We are likely somewhere in the teal (light blue) box, and I have drawn the solid vertical blue line to indicate where I think we might be as well. Utilities are starting to outperform, while Energy, Consumer Staples, and Healthcare Services have been doing well for some time now.

This would indicate that the Stock Market is in a bear market, and the US Economy (green arch) is beginning Early Recession. This would match well with the TV pundits that are pondering whether or not we’re already in a Recession.

These charts are courtesy StockCharts.com founded by John Murphy. Murphy frequently discusses Sector Rotation insights as well as education on Inter-market analysis, and I am providing an example of a video presentation from INO.com TV (discussed briefly in my earlier post):


This presentation, and many other videos are available to you there (membership page). It’s actually $12 per month for unlimited access, or $8 per month with a full-year membership. I am very much enjoying my membership so far and the vast number of presentations available to me there. I only wish I had more time to watch additional videos!

I strongly encourage you learn more about the potential forecasting value of Sector Rotation Theory, as it served to me as one of those “lightbulb” educational moments when was first introduced to the concept of money flow and institutional movements into and out of key sectors at definitive points in the business cycle and economy.

Sector Rotation Theory can be of benefit primarily to the longer-term investor, but also is is extremely applicable to swing traders and even day traders who hone in on key stocks in key sectors that they expect to move in the next few days.

Whatever the resolution, we’re in for some interesting times ahead!

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