Is a Bullish Sector Rotation Occurring?

Feb 2, 2008: 9:44 PM CST

According to the Sector Rotation model, a bit of bullishness may be underlying the recent market moves.

Let’s see:

As of early January 2008, funds have been taking money out of Energy and Technology stocks (which were major winners of 2007) and are pouring it into the beaten down Financial and Consumer Discretionary Spending Sectors, which are early beneficiaries of lower interest rates and often bottom first when a recovery is expected.

Recall that the above performance is relative to the S&P 500 index, and do not represent absolute returns. If so, then all sectors listed above would be negative. But what’s crucial to see is the reverse in flow and the direct correlation of relative performance between these four key sectors of the market.

Let’s actually look at the absolute sector returns for the last two weeks:

The Financial Sector beat all others with a 16% appreciation! Consumer Discretionary Spending was not far behind, with an 11% gain. These signals often occur just after, or around a market bottom according to the theory, as big money begins to bet on a recovery and takes positions in these sectors which have been beaten down significantly by investors. Are they now recovering?

If so, this could be a very bullish sign for the overall market. While the absolute bottom may or may not have formed, the sector rotation model is providing potentially bullish information to those open to listen.

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