Sector rotation update

April is a transitional month. From a  seasonal perspective, it can be a very strong month for markets. April also leads some traditional seasonal rotations. To witness these rotations, we might take a look at the sector performance chart a couple of times during April. In my March 24th blog, I noted a very clear movement into utilities, staples and communications. I also noted how industrials continued to lead in sector strength.

It is interesting to see that some of those rotations are taking a breather. I conducted another 22 day lookback period today, which, like the last study, is pretty close to a month /30 days (including weekends). Recall that these studies are not showing percentage gain or loss on the sector. They are showing percentage performance relative to the S&P 500. So a sector showing a big number up or down didn’t actually make or lose that percentage. It out or under performed the SPX by the percentage noted. Here’s what we are seeing at the halfway point for April:

April is living up to its reputation of swings. Note how communications, industrials and staples are all taking a rest after their former months performance. Similarly, energy got a bit of a relative pounding both relative to the SPX and on an absolute return basis. So too did materials and financials. Those three sectors have been the place to be over the past 6 months. Meanwhile, technology and consumer discretionary stocks got a small lift on a relative basis.

Technically, it makes sense to see the punished technology sector find a bid this month. April is often strong for the sector. Coming into May, the sectors that tend to do the worst for the coming months are materials, energy, technology, and discretionary stocks. So you might see a bit of a blast for technology and discretionary stocks and the others noted. Thereafter, one might see further weakness in these stocks, on a relative basis, over the summer.

Readers of this blog know that ValueTrend has been big on the reflation names like materials and oil/gas energy and agriculture. We’ve made some serious upside in these sectors. Recently, we reduced our exposure by about 1/3rd. This, with the seasonal period in mind, and the potential of a pullback after the stellar performance of recent months. However, our thesis remains that the big base formations seen on many of the stocks in those sectors–particularly energy- should lead into renewed strength come the end of the summer. Because we cannot time it perfectly, we chose to sell some, but not all, of our exposure to reflation names. We continue to hold a 6-12 month bullish outlook for them. In fact, we might reinstate our overweight positions later in the summer.

Meanwhile, we continue to like the staples, utilities, and communications stocks – albeit, very selectively. I conducted an interview with the Globe and Mail recently (I’ll post the link when available), and told the journalist that just buying a sector ETF in those sectors is not the best idea. When I peel through the names in those sector ETF’s, I find too many stocks I would not touch. So, the value is there, and the charts show tremendous potential for some of the names in those sectors. But you should expect to have to do some legwork if you really want to maximize the performance of the sectors in question.

For those who get the ValueTrend newsletter, you would have been made aware of two of our stock purchases of late. If you wish to subscribe to that newsletter, click here. One of the stocks we noted was a staple – Kraft Heinz. We typically leg in to stocks in 2 or 3 stages. We did leg #1 into KFT about a month ago. So far so good – the stock is up. Earnings are our in a couple of weeks, so if the stock illustrates stable financials, we may add to our position. A bearish report would influence a sell. Here is the chart. Note the bottom formation (H&S) with the recent neckline break. That’s where we entered. Should the stock continue to illustrate strength, we envision a potential double from our original entry in the mid-$30’s. The risks are there (the company has struggled with commodity prices and competition), but new management is making strategic moves that may make the difference. Again, we are looking for value right now, more than growth. Stocks like this fit that bill for our outlook.

Next week I will do a synopsis of the broad market technical profile. My recent blog on the Bear-o-meter suggests neutral, but declining stability. As such, its probably a good idea to review the big picture as we draw closer to the “Sell in May and Go Away” time of the year. Meanwhile, I just posted a video that revisited the monthly first half/second half trading pattern of the SPX. Here’s the link.

As always, post your comments below. I read them all, and I’m always looking for feedback on what you as a reader want to see me cover.