Mid-2012 Sector Rotation Signal Checkup

Jul 3, 2012: 8:37 AM CST

With half of 2012 behind us, let’s take a quick check of what the Sector Rotation Model is suggesting, both from a Year-to-Date perspective and from the 2012 peak so far.

First, let’s update Sector Performance Year-to-Date:

The Sector Rotation Model classifies the major sectors into two broader categories:  Offensive or “Risk-On” Sectors (such as Technology and Financials) and Defensive or “Risk-Off” Sectors like Utilities, Staples, and Health Care.

By observing which group – and then individual sectors – are outperforming and under-performing the S&P 500 Index, investors can glean insights about the health of the economy/market and then can drill-down to strong stocks in strong sectors for investing or swing-trading candidates.

Year-to-Date, the S&P 500 is up 8.5%, and there are four sectors with performances greater than 9%:

Financials (+14%), Consumer Discretionary (+13%), Technology (+14%) and surprisingly, Health Care (+12%).

A quick glance at the model shows strength in the Offensive/Risk-On Sectors, though the Defensive Sectors do not necessarily show significant under-performance (in reality, Staples and Health Care have outperformed).

The Relative Weakness so far comes in four Sectors:

Industrials (+6%), Materials (+6%), Utilities (+5.5%) and – very interestingly – Energy (down 3%).

From the classic interpretation of the Model, there are two surprises, or factors to watch closely:

Weakness in Energy (Oil) and Strength in Health Care.

Those two factors buck the standard Offensive/Defensive performance metrics.

The performance metrics shown above are from the AMEX Sector SPDRs.

We can compare Sector Performance from market peaks and bottoms, and these can be very important to consider for Swing Traders.

For example, here are the returns from the April 2, 2012 SP500 peak to present (July 2):

The performance above is what we would expect to see based on the classic model – clear weakness in the Offensive/Risk-On Sectors with clear out-performance (relative strength) in the Defensive Sectors.

In fact, during a period where the S&P 500 declined 3%, the three Defensive Sectors GAINED value during this time (a reminder of their “protective” value in a down-market).

The worst performing sector again was Energy which declined 7% during this time.

Utilities performed the best – rallying almost 8%.

Again, we see the factors that bucked the trend in the Year-to-Date Model:

Persistent Weakness in Energy and Surprising Strength in Utilities and Health Care.

Speaking of Utilities, here is a Daily Chart of 2012 so far (XLU):

While the S&P 500 clearly trades under its April 2012 peak (currently), Utililties (XLU) trade slightly above its June new recovery high.

In fact, the Weekly Chart shows a persistent and stable uptrend from the 2009 low.

Though not seen in this update, the Health Care Sector (XLV) also shows a similar constant uptrend and new recovery highs.

Continue monitoring Sector Performance and the “hidden leader” Utilities/Health Care which has historically been a safety/defensive spot to hide from a down market.

I’ll be discussing Sector Rotation (“Find the Strongest Stocks in the Strongest Sectors“)  much more detail during the World Money Show San Francisco (information link) on August 26th.

If you’ll be able to travel there, consider joining us for another informative and exciting Expo!

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

3 Comments

3 Responses to “Mid-2012 Sector Rotation Signal Checkup”

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