Insights from Recent Sector Rotation Charting

Jun 24, 2013: 10:59 AM CST

This morning we viewed the “Recent Shift in Intermarket Money Flow” and I wanted to follow-up with a quick glance at Sector Rotation Money Flow within the stock market.

We’ll start with a Year-to-Date view and then zero-in on what has transpired since the mid-May 2013 peak (weeks ahead of the fateful Federal Reserve Policy Announcement last week).

Here’s our classic view of the 9 major US Sectors (using AMEX Sector SPDR ETFs):

Year to Date Sector Rotation and Money Flow for the Stock Market

When looking at Sector Rotation charts, we want to focus on the Five “Risk-On” or Offensive Sectors (Financials, Discretionary/Retail, Technology, Industrials, and Materials) which I always group on the left side of the comparison chart and the three “Risk-Off” or Defensive Sectors (Staples Health Care, and Utilities).

We compare sector performance in terms of Risk-Off/Risk-On dynamics as well as individual sector performance to the SP500 Index (the red bar on the right side of the chart).

Energy (XLE) tends to be its own island in the middle of the chart to separate the two broader groups.

Year to date, we see three strong performers (percentage returns) and those are the Health Care (XLV up 20%), Financials (XLF up 17.50%), and Consumer Discretionary/Retail (XLY up 17%) sectors.

Two other sectors have “outperformed” the SP500’s return to date of 11.50% and those are Industrials (XLI up 12.5%) and Consumer Staples (XLP up 14%).

As we’ve been seeing for months, the sector performance paints a muddy picture with strength (relative performance) coming BOTH from two Offensive or Risk-On Sectors and two Defensive or Risk-Off Sectors.

It highlights the dual-mind of investors, some of whom see an “All-Clear” with a recovering economy and an accommodative Federal Reserve/Central Bank continuing to provide stimulus to an economy in recovery.

Others reference the underlying problems with a weak economy and political gridlock along with global economic concerns still lingering.

Whatever your perspective, the Sector Rotation Chart continues to reflect the split between Bulls and Bears as opposed to classic money flow where we see relative strength in Offensive Sectors along with relative weakness in Defensive Sectors as a true “all clear bullish” signal.

Let’s step inside the Sector Performance from the May 2013 peak to the present low as of last weekend:

Sector Rotation Money flow from 2013 Top

The chart from May 17 to June 21 (weekend) 2013 shows an entirely different picture than the Year to Date performance.

For starters, we see something that should not happen in a classical sense:  Utilities – a Defensive/Risk-Off Sector – are the worst performer since the peak, collapsing 9%.

Health Care – a leader on the way up – was the ‘strongest’ sector and by that we mean it lost the least money (down 3.25%) relative to all other sectors and the broader SP500 which declined at a greater percentage.

We see “clustering” of performance around the 3.5% decline level so no sector stands out as an obvious winner or loser with the exception of Utilities.

Reference our prior update on the topic “Staples and Utilities:  One of these Defensive Sectors is NOT Like the Other.

The recent focus has been on the reduction of stimulus and the artificial stimulus-manipulation of interest rates lower.

While traders/investors ‘chased’ high yielding vehicles including Utilities and REITs (real estate investment trusts), as the discussion shifts to a future reduction of stimulus many of these traders are adjusting portfolios quickly to account for the likelihood (and now reality) of higher rates in the future (the unwinding from a ‘crowded’ trade).

We’ll continue to monitor the price action and “unwinding” of high-yielding Utilities and other insights from the broader trends inside the Stock Market from a Sector Rotation perspective.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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Corey’s new book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

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