Quick Lessons from 2013 Sector Rotation ETF Model

Jan 3, 2014: 2:31 PM CST

While 2013 was a stellar year for the US Equity Market, we continued to see salient trends in relative strength (or weakness) in the nine major market sectors.

Let’s take a quick look at the 2013 performance and glean a few quick insights from sector trends and stock selection (specifically, is it better to stick with relative strength winners or try to buy value in relative strength losers).

Here’s the postmortem sector ETF performance for 2013:

Sector Rotation Model Performance for 2013 Stock Market ETF Sectors SPDR

Using StockCharts.com data (PerfChart), we see our classic relative strength appearing in the Offensive (risk-on) Sectors in a bull market (Financials, Discretionary, Industrials particularly) and relative weakness persisting in the Defensive (risk-off/protective) Sectors such as Staples and Utilities (Health Care was an exception in 2013).

In a bull market – and 2013 was unarguably a strong bull market year  – relative winners (stocks and sectors that outperform the S&P 500) tend to show up in the “Risk-On” or Offensive Sectors in the green highlight above.

Similarly, relative weakness (stocks that may still rise for the year but increase less than the S&P 500) appears in the Defensive cluster.

For example, the S&P 500 recorded a 25% gain and the three top sectors were Consumer Discretionary/Cyclicals (up almost 40%), Health Care (up 38%) and Industrials (up 35%) all measured by AMEX Sector SPDRs (XLY, XLV, and XLI respectively).

This is great in hindsight, but what lessons can we learn from the data?

Let’s see what we can glean from a broader view of sector trend performance:

Sector Rotation Sector Performance AMEX Sector SPDR 2013 Stock market Performance S&P 500 Relative Strength Relative Weakness

While the previous chart showed the annual percentage gain as a fixed value, we can see the twists and turns each sector ETF took throughout 2013.

Look closely at the color-coded graph above.  True to form, the S&P 500 itself (red line) finished the year in the middle of the pack of sectors.

The four sectors that returned greater percentage values “outperformed” the S&P 500 (XLF, XLI, XLV, XLY) while the five sectors that returned an annual gain less than the S&P 500 “underperformed” the market.

We can also compare sectors to other sectors or as a broader group of “Offensive and Defensive” sectors.

I think a clearer pattern emerges when we compare all sectors relative to the S&P 500 – meaning we only chart the percentage of over or under performance “relative” to the S&P 500.

That’s what the final chart does – compares all annual sector performance relative to the S&P 500:

Sector Rotation Sector Performance AMEX Sector SPDR 2013 Stock market Performance S&P 500 Relative Strength Relative Weakness

Of specific interest is a possible solution to the age-old investment question:

“Should I buy what’s strong and getting stronger – which feels uncomfortable – or should I buy what’s weak and about to reverse so that I get a better value  – which feels more comfortable?”

2013 makes the answer clear – go with what works and avoid what does not.

With the exception of the April volatility in the market, sector trends established earlier in the year were salient, meaning that they continued throughout the remainder of the year.

In simple terms, what was strong simply stayed strong or got even stronger; what was weak stayed weak or got even weaker.

Calling bottoms in weak sectors DID NOT work as well in 2013 as jumping into existing trends and riding them with retracement or breakout trading tactics.

For example, Utilities were among the three ‘worst’ performing sectors by May 2013 and simply continued making new lows (relative performance) throughout the end of the year.  The same is true to an extend with the “relative strength losers” of XLB Materials and XLK technology.

Energy (XLE) and Consumer Staples hovered about the midpoint of the relative performance graph from April/May and remained ‘flatlined’ throughout the rest of the year (performing “in-line” with the S&P 500).

The big winners of 2013 were early year sector winners that remained sector winners throughout the rest of the year – XLV Health Care and XLY Consumer Discretionary/Cyclicals.

Industrials (XLI) gained strength toward the end of the year and Financials (XLF) stayed relatively consistent from July forward.

The major exception to the rule was the unusually volatile Utilities (XLU) sector which gained strength in April yet collapsed (as I highlighted as the breakdown developed and then throughout the year) in May.

In fact, take a look at real-time commentaries I posted throughout the year with respect to Sector Strength/Weakness and the broader Rotation Model:

Sector Strength Grid to End October

Weekend Sector Strength and Weakness – October 19

Quick Sector ETF Charting for August 26

Charting Sector Strength at Stock Market Breakout to All-Time Highs” August 1

Charting the Three Strongest Sectors at All-Time Highs” – July 12

What Strength in Retail/Discretionary Hints about the Broader Stock Market” (great reference post)

Insights from June 24 Sector Rotation Charting

Utilities and Staples – One of these Defensive Sectors is NOT Like the Other” (May 28)

Sector Performance YTD to End April

Five Stable Trending Consumer Staples Stocks

Charting the Four Sectors above their 2007 Highs” (January 15)

As always, continue following along for additional insights and investment/trading strategies throughout 2014 as we continue to monitor opportunities from a Sector Rotation perspective.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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3 Comments

3 Responses to “Quick Lessons from 2013 Sector Rotation ETF Model”

  1. Saturday links: tech hub envy | Abnormal Returns Says:

    […] Offensive sectors won in 2013.  (Afraid to Trade) […]

  2. CalcRisk Says:

    Great post, very interesting way to evaluate and plan.

  3. Quick Sector Rotation View of Selloff and Retracement | Afraid to Trade.com Blog Says:

    […] “Quick Lessons from the 2013 Sector Rotation Model” […]