You don’t want to miss this sector rotation

March 24, 202123 Comments

I believe that the US indices may stage a correction or pullback in the coming months.

I have mentioned this in recent blogs: Things have changed for the markets. The current environment is not ideal for buy n’ hold investors. Over the past 5 years, buy n’ hold worked very well. It hasn’t worked as well in the past 6 months. Sector rotation has created a more volatile investment climate. That isn’t conducive to a good return in a steady buy n hold index strategy.

Since the Trump election 2017, investors have been taught that buying and holding index stocks, or the top names in the US indices (specifically the FAANG & technology names) was all you needed to do. In an environment of little sector rotation, any fool could become a successful investor. Buy an index. Or buy the FAANGs (and related tech names). Bob’s your uncle (as the British say)- you’re all set, nothing much else to do. Much banter around “couch potato portfolio management” coincided with the easy returns on index ETF’s.

In the fall of 2020, we began to see early signs of sector rotation. The FAANGs and other tech names largely began to trade sideways. Value began to break out of a base. Reflation stocks started to catch a bid. I gave readers a heads up to these rotations through the late summer and early fall.

Now, we are starting to witness another rotation. You read it here first. About a month ago I noted that the best values out there were in consumer staples, utilities and communications stocks. Were you paying attention? Check out any of my blogs or my videos to verify that statement. Here we are a month later, and that sector rotation outlook is looking to be another correct call. The chart below is a sector performance bar chart available from stockcharts.com. I set the timeframe to 22 days, which happens to be the approximate number of trading days over the past 30 days (30 – 8 weekend days). You will note on the chart that:

  • Technology (blue)  and consumer discretionary (pink) – the former leaders, are now lagging the S&P 500 the most
  • Consumer staples (purple), utilities (red) and communication stocks (bright green) are now outperforming the S&P 500 the most. These, along with industrials (bright blue), which continue to outperform (much of the value stock names came from the industrial sector)

So, the new sectors that will, in my opinion, outperform the markets for the coming months are staples, utilities and communications. This might makes sense. Here’s why:

Lets face it – markets indices are pretty overbought. That’s because the leading overweight sectors in the SPX and NAZDAQ such as technology, and consumer discretionary stocks are overbought. I believe that these indices may stage a correction or pullback in the coming months. But, as I have harped on in the past – this market is a “barbell” market with too much weight on the one side of the barbell. It is those sectors that are overbought that will feel the brunt of that correction.

Herein lies the opportunity: I believe that, due to low interest rates and plenty of money supply, money will stay in equities.  But it will continuously rotate into the areas market players foresee as the next move. I believe market players are just now waking up to my call for a value play in the three sectors mentioned. Staples, utilities, communications.  Call it a flight to safety. Call it a rotation to value. Call Bob, your uncle. I don’t care. At ValueTrend, we began to ease into these sectors a month ago. We anticipate more such moves in the coming weeks. Perhaps you should too.

 

 

Do yourself a favor

If you or your family are not taking advantage of the rotations of todays markets, do yourself a favor: Contact us by email, or telephone here

We’ll be happy to set up a phone conference or Zoom meeting to explain how we can manage your money as prudently and conservatively as we all of our clients. There’s no obligation or pressure when you reach out to us. It’s a friendly conversation with Keith & Craig, where you’ll get straight answers without the sales-pitch!  We look after family investments – including RRSP, TFSA, Corporate and Personal Investment Accounts. If you hold around $500k or higher and feel you need a second opinion on your portfolio, give us a call!

23 Comments

  • Would you consider rotated out of energy into the aforementioned sectors? I recently sold Shaw with the takeover offer by Rogers. I am considering transferring those funds to Telus. However I am trying to figure out the direction of energy as I hold a few of those stocks.

    Reply
    • Dave good question
      I hold a longer termed view for oil, so I am ignoring the neartermed blips- so I am using other sectors like financials (although I am still in financials, just peeling some out here and there) to raise cash and rotate into the 3 sectors mentioned

      Reply
  • Hi Keith,

    We hit almost $7 on XEG.TO which was your target for the pullback. Are any indicators of yours showing it could possibly head lower or are they showing bottom looks to mostly likely to be in around this $7 area?

    Thanks,
    Lee

    Reply
    • soil is finding support today–if that lasts 2 more days, then yes, it will likely be a bottom. I use 3 days minimum for support to prove -see my book Sideways

      Reply
  • Thanks, Keith, I bought your book some years back. I have it out now and thanks for the 3 day “rule” reminder.

    Lee

    Reply
  • Keeping in mind that the US market has outperformed the Canadian counterpart; the tech and cons. disc. being a smaller weight in TSX that tilts to energy and materials. Do you see a similar rotation in Canada as well? Do you feel the barbell in Canada overbought in tech and cons. disc.? Maybe in Energy but not in Materials. So how does the rotation take place in Canada?

    Reply
    • Canada, as you note, is not overweight tech. Nor does it have the FAANG presence. SHOP is the closest thing to that. So to me, a somewhat overweight approach to Canada is making sense now. Commodity stocks are in abundance, but we also have telecom and utilities too. As for staples…we have a bit..but the US is where we are buying in that sector.

      Reply
  • It definitely seems like the easy money has been made. Time to buy was the start of Covid. On the weekly we are way above the 200 week MA. Can’t stay so elevated forever. A big correction will hurt all stocks of course some will be hurt less.

    Reply
  • Am I hearing your thoughts correctly Keith? You are not moving away from energy, even as general markets soften or perhaps enter a period of correction, and the seasonal period of strength for energy comes to an end shortly in May … am I reading this right? Thanks always for sharing your views.

    Reply
    • No we have not sold energy yet. Our view is longer termed on that trade–however, to your point, we are seeing the neartermed canal blockage as a boost on oil since its recent pullback. We may lighten a couple of select positions (not eliminate) in the coming weeks or two if we get the rally, just to take some profits and possibly play a summer selloff. TBD–we are still fully invested in oil right now.

      Reply
  • So to be clear in the Canadian market:
    Communication sector is mainly telecom stocks (BCE, Rogers, Telus) right?
    Utilities include the likes of Fortis, Emera, Northland, Algonquin types right?
    So your justification is flight to safety and sector rotation to value.
    I can see the names mentioned above have low BETA so that adds to safety. Does the value side come from them paying a decent dividend with moderate growth expectations? Value being in a correction market and a seasonaly weak time frame these stocks pay to hold them and may have a bit of growth as we move back into the Oct strong period? Is that kinda the logic? Thanks

    Reply
  • Keith: I read your Jan 29,2021 blog on inflation. BTW the search option on the blog site now works. My 90yr old mother-in-law who has GIC’s said “in 6 months I expect interest rates will rise because of inflation”. Your blog implies to me that yes we will have inflation, but the key drivers of spending our savings, consuming gasoline, higher min wages in the US, and made in America content won’t hit CPI until 2021.
    So what do I tell her? Inflation won’t be significant until 2021 and at that time interest rates may begin to rise?
    Thanks Keith

    Reply
    • exactly what you said- inflation is likely to come in later this year of next year–at least, thats the thought from the economists I read

      Reply
  • I looked for your recent blog on banks and found Dec 2020. Since then we have gone through the “flat period through to Feb” and now bullish again into April as the Equity clock chart suggested.
    You questioned whether this sector could be bullish into April but it seems like it is. ZEB RSI is in overbought territory. Interest rates are still low. Might you consider doing a short blog to update where the Canadian banks may go from here? Equity clock shows maybe a 2% correction through the summer period followed by growth. But for a year now banks have steadily recovered. I’d like your assessment where banks may go from here for the remainder of the year. Will they find strong headwinds? Will they flatten and us income investors take our 4-5% dividends from here and be happy? Thanks

    Reply
  • Hey Keith, do fractals apply to any of your trading techniques? Also when is the ETA on the new book?
    Thanks,
    Shawn

    Reply
    • Shawn–you are far too smart for me. I didn’t even know what fractals were until you mentioned them. I looked the term up. Being the old school simple guy I am, I will say that no, I don’t use them–although some of the research services I subscribe to might…
      Book is in the final rounds–I just finished my final edit. A few more charts to label–and off it goes to the editor, then to the publisher. ETA…perhaps June.

      Reply
  • While the Canadian ETF market has certainly grown, there’s very few sector specific ETFs compared to the US. In the few that we have, it’s not “pure” BMO’s COMM ETF has 25%+ of its holdings in FAANGs

    Reply
    • Update: I did more homework. XLC holds 49% in FANNG! (they use different indexes)

      Reply
      • Re communications–I’d probably stick with old-world communications stocks like telecom–thats what we are inching into as one of our positions

        Reply

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