Sector Rotation Shows Defensiveness

Nov 10, 2007: 12:55 PM CST

The implications from Sector Rotation Theory are showing more bearish/defensive themes are occurring with money flow across the nine major US Sectors.

Over the last 65 days, energy prices led the charge with the greatest sector percentage increase, and we are seeing significant strength as well in the usually dormant utilities sector. Consumer staples (a defensive area) and Healthcare (also defensive) are showing initial signs of strength.

Think of the above chart in terms of left to right progression or flow of funds/money from one sector to the next from left to right.

The bulk of the flow is still centered in the Materials and Energy sectors, with early strength (and opportunities for profit) occurring in the traditionally more defensive sectors (where the “big funds” rotate to preserve capital, rather than earn massive amounts of capital).

As is true with Sector Rotation Theory, there are certain sectors, usually those ‘out of favor’ in terms of the cycle that are experiencing significant ‘outflows’ of cash. At this time, these sectors are the Financials (worst performing sector) and the Consumer Discretionary (retail, entertainment) etc. Taken alone, these developments are quite bearish for the overall market as a whole.

As a refresher, here is the basic progression of “Sector Rotation Theory” as detailed briefly on StockCharts.com:

I have added a red rectangle indicating the possible current location in the market cycle, which corresponds with the “Market Top” location.

Insights from Sector Rotation are somewhat complex, but well worth the effort to study the implications of the theory.

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