Recent Clues from Sector Rotation

Let’s take a quick look at what the sector analysis is saying.

First, let’s look at year-to-day (76 days) returns for the nine major SPRD sectors according to StockCharts.com:

The Materials (up 6.5%) and Energy (up 5.6%) sectors have outperformed all others, while the Health Care (down 10%) and Technology (down 10.5%).

While the Sector Rotation Model would expect Technology stocks to be down in a defensive (or down) overall market, it is surprising to me to see Health Care stocks (which typically are used as a defensive posture and/or don’t follow normal sector rotation patterns) to be down just as much. This development bucks the expected direction.

Now, let’s look at the Sector performance relative to the S&P 500 Index:

Again, we would expect Energy stocks to do well going into a defensive market, as this sector tends to ‘top out’ as the economy tops out due to the increased spending cuts that consumers and businesses take due to higher fuel costs (and transportation costs).

It’s also a little surprising to see Materials stocks – which often do well in mid to late economic expansions – performing higher than energy stocks.

These developments warrant further investigation in my opinion.

Sector Rotation analysis can give you a ‘heads up’ about where the larger money could be flowing as the economy (and stock market cycle) progresses from one stage to the next.