Quick Sector Rotation Check off the September Lows

Dec 3, 2010: 2:52 PM CST

With the S&P 500 batting up against new recovery highs, what does the short-term sector rotation/strength model show us?  Good question!

Let’s take a look at the recent move off the 1,040 level (September lows) to the present push to the 1,220 level (early December) and take note of the strongest sectors and insights from the model.

Here’s the graph:

What’s funny is that the graph above is almost identical to that I showed on November 14th’s similar Sector Rotation Update Post.

I guess that’s not surprising, but it’s interesting nonetheless.

Here’s a repeat of the text – which still is true today – from the prior post:

“[L]ooking at the early September to mid-November rally – the Model is showing bullish confirming strength.

It suggests that – as long as the rally continues – investors would look to be positioned in the Offensive Sectors, though what happens at the key resistance at 1,230 is key.”

Here we are now – a few weeks later – back at the 1,220/1,230 level which is a return to this price zone seen on November 5th.

What’s different is that the percentages are just a bit greater, with the S&P 500 up over 16% from the low and the two best-performing sectors are still Energy (XLF) up 28% and Consumer Discretionary/Retail (XLY) up almost 25%.

The worst performing sectors are – as expected – the “Defensive” grouping of the Consumer Staples (XLP), Health Care (XLV), and Utilities (XLU).  In a bullish expansion, you generally don’t want to play in defensive stocks unless you’re hedging.

The goal is to try to pick out the strongest stocks in the strongest sectors – so far that’s Retail/Discretionary and Energy – in a rally to try for the best bang for your investing or trading buck.

The one stand-out worth mentioning is the Financials – XLF – which are underperforming the S&P 500 (they’re up about 12% while the index us up over 16%).

That’s not something you want to see if you’re bullish, so it’s a little bit of a black-eye on the rotation model, but otherwise the model is showing bullish strength.

And of course, any S&P 500 index breakout above the 1,230 area – which would be a new recovery (2010) high – would further the bullish strength and argue for continued bullish bets/sentiment.

Keep watching what happens at 1,230 and the respective performance of leading stocks in leading sectors.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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