Year to Date Sector Rotation Insights August 2016
Bull? Bear? Top forming? What’s the message from the Sector Rotation Model at the moment?
Here we go!
Under the Sector Rotation Model, we compare and contrast money flow – via relative strength – between the Offensive Groups (green above) and the Defensive Groups (red).
In general, if insiders and large funds are bullish or optimistic about the future of the economy and thus the stock market, they’ll deploy capital into stocks and sectors like Financials and Technology.
If they feel the future is less bright, they may remain invested but will increase exposure to defensive stocks (high yield, low volatility) and groups like Consumer Staples and Health Care.
That being said, what’s the message?
Energy is the #1 group so far in 2016 (at the moment) followed closely by Utilities.
Both rose about 18% so far in 2016.
Is that bullish? No, it’s not.
It suggests a Late Cycle environment where money is not boosting Financials or Consumer Discretionary stocks (the left side of the chart) but instead are playing more defensively.
The strength in Industrials and Materials suggests funds are not overwhelmingly bearish – they’re simply not – but that they’re playing more protectively and guarding profits as opposed to attempting to expand profits aggressively.
The strong performance in Utilities further paints a bearish or defensive/risk-averse environment.
It can be helpful to follow this model to get a sense of where money is flowing and whether the big players are aggressive/offensive (Risk-ON) or – as seems to be the case now – are more protective/defensive (Risk-OFF).
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Corey Rosenbloom, CMT
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