Be cautious about these market sectors

October 27, 2014, No Comments


During a rotational bull market such as the one we have been in for the past couple of years, leadership changes hands – money rolls from  a currently strong sector into a formerly weaker sector or stock. I suspect that a few of the current market leaders – many of which have been defensive sectors, may begin to underperform the higher beta sectors over the winter. I believe that markets may rotate out of some of these defensive stocks and into higher beta stocks after a few more weeks of market chop. I discussed the potential for a bit of near near termed volatility in my last blog.

Defensive sectors such as utilities and consumer staples are currently in good shape – trends are strong on utilities (XLU weekly chart below) in particular, given its recent breakout

The staples sector (XLP daily chart below) is testing current resistance – its comparative relative strength is weakening a bit –it’s still on trend, but keep an eye on this sector for potential rotation

Bonds, often a defensive sector receiving positive rotation in a stock market selloff, are beginning to show some weakness. The US treasury long bond TLT ETF is weakening. Money is rotating out and the relative strength vs the S&P500 is negative after its defensive rally during the recent correction.

Keep an eye on your defensive sector holdings such as the three mentioned above. While its not necessarily the time to dump the stocks or ETF’s in these areas, you may find them beginning to under perform the broader markets over the winter. For traders wishing to maintain a portfolio of positive outperformers, you may want to rotate out of these positions upon further comparative relative strength weakness.

In my blog later this week, I will discuss some sectors seeing a potentially positive rotation that may be worth consideration as new positions for traders.

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