Rotation is going to be key this winter

I’ve referred to the market over the past couple of years as a “stealth” market. That is, one that sees money  rotate from winning stocks into depressed stocks, and vice-versa. Rotation from sector to sector is also becoming faster and more pronounced of late. I’ve created a little mantra – perhaps it won’t become as well known as the one created by Don Vialoux—that is, “Sell in May and Go Away” . But if you can remember the following ditty, it may help you in markets as we move forward:

 

Yesterday’s hero becomes tomorrow zero.

 

In today’s blog, I’d like to suggest that there is at least some potential for a major rotation to occur this winter from my current favorites (“hero’s”) of US technology, Canadian banks, Canadian telecom, US consumer discretionary stocks into the currently depressed energy and materials sectors ( current “zero’s”).

First, let’s look at the S&P500 and its current resistance levels. As you will note on the chart- we are still in a sideways market. Yes, we’ve put in a bottom after the summer’s top, then correction (all of which, as readers know, this blog called correctly). Yes, its  rallying at this time. But the ceiling at 2130 or so on the S&P500 has been tested (at or near that level) too many times since March of this year. It’s not going to be easy for the markets to blow through those old highs. I’m not saying it won’t happen. In fact, it probably will – eventually. But I do think the markets will pause at that point, and probably begin to rotate from today’s leading sectors into some depressed sectors.  That rotation may be what pushes markets to new highs. Or…not. We shall see.

S&P nearterm

Energy…today’s “zero”

Below is a chart of WTI oil. I believe that oil, and energy related stocks, are in the process of basing. They are not buys at this time. They are merely “watch” candidates. I’ve drawn the neckline levels I’d like to see broken to the upside that might inspire me to begin rotating into them. As you will see on the WTI chart- oil is trying to put in a bottom. Officially, its still in a downtrend (lower highs and lows, below 200 day MA). Will it put in a H&S bottom? You and I can’t say. It’s much too early to make such a prediction. But, the formation looks like its attempting such a move. Time will tell. A break of $62 would indicate a new bullish phase for this commodity and a return to $90. That’s a long way off. But, things change quickly these days. Keep an eye on oil.

oil short

Energy stocks – which can be influenced by natural gas in addition to oil (depending on the individual stock’s revenue base) , are still in a downtrend. I’m illustrating the sector via the iShares Capped Energy ETF (XEG) below. Again, below the 200 day MA, lower lows and highs. As the police officer says at the site of a disaster “Nothing to see here, folks, move along”. True for the energy sector, nothing bullish to see here folks….yet. If, and only if, $12 is broken to the upside – and holds for a few days or more-  for this ETF and many of its components, there may indeed be something to see here.

XEG

Keith speaking at the MoneyShow this Saturday October 31, 2015 at 3:30pm

Please come out and join me – I really enjoy meeting readers of this blog at my speaking engagements. Here is the link for the details.

keint Nov 2012 small

16 Comments

  • Another investor I was reading says he avoids markets where the 200 day looks flat. According to him you will get chopped up trying to invest in such a market or as you said it’s mainly sideways action. He doesn’t get involved until the 200 day starts to turn upwards. Currently WTIC and the S&P are both looking flat which I suppose confirms your reluctance to call oil a buy currently.

    Reply
    • Hey Dave–from where I bought (October 3rd-7th) I will be in profit even if it levels off now. however, I do believe we will see 2130-ish on the S&P500–which is only a few % away I know. But–if you own leading sectors in that market then rotate them as they round over, you can make money.

      Reply
  • Keith:

    Always enjoy and value your comments. Speaking of rotating sectors, there has been considerable press lately of short sellers driving stock prices. What would a professional do,( yourself) should you own a stock that were being targeted such as DH has been lately. Dump and run or hang on or somewhere in between. Thanks.

    Reply
    • Hi Terry–whether its caused by shorts or other forces, when a stock breaks a trendline, breaks the 200 day MA, and takes out the last low (August) such as DH has–I look to sell.
      Stocks always have risk, always have upside potential too. Yes, DH may turn around. But this one looks skewed to risk–there are way better charts out there–rotate into something that looks less risky and is breaking out to the UPSIDE–CDN banks, telecom, US tech, consumer discretionary, lots out there with less risk/ better technicals built into their charts

      Reply
  • You mentioned “materials” as a sector that could rotate into eventually.
    What type of stocks fall into the Materials sector?
    Is there a site to look at that identifies stocks in particular sectors (ie you mention consumer discretionary and we also know consumer staples. How does one know what individual stocks fall into these various sectors?

    Previously you mentioned BBT bank. It is just below $37. Is it still a buy at this stage? I think you suggested a general target may be it’s previous high of $40? That would be an 8% ROI which works for me.

    Much appreciated….. Daddyo

    Reply
    • The US SPDR Materials ETF is the one I refer to = XLB-US – in it are a lot of chemical companies–things like Dupont and Dow and Monsanto, which make up 30% of the ETF.
      The iShares CDN version of a Materials ETF (XMA-T) holds a bit of potash, then metals. Very different definitions of “materials”, eh?
      The XLB has a much better looking chart, from a base and potential breakout perspective

      BBT–we bought it off of the low, and yes, suspect its a $40-$41 target. I think it may get there before new year- still some upside potential left at current levels, but not as lucrative as it was a month ago of course.

      Reply
  • a topic for a future blog might be property pricing and its effect on equity classes.
    Is there evidence that property values are over priced?
    Canada only or USA as well?
    What is the probability of a housing or even commercial property bubble burst?
    If a correction in pricing were to happen what might the effects be on certain asset classes (ie REITS, banks or lending institutions, other?)

    Cheers

    Reply
    • Excellent suggestion–I will see if I can find charts to do a study

      Reply
  • Is United Technologies still priced for sale? Using ZQQ or XLK for the technology sector, is it still good until January? Over the next few months, will the US dollar likely be in this range? Thanks.

    Reply
    • John–wow, lots of questions!
      First, do a search in this blog for Canadian dollar–I did a writeup on it a while ago–nuts n bolts of it were that – while the C$ looks bearish, the USD is hitting resistnace so it may pause. So its likely a flat proposition for the C$ for at least until oil pops.
      Next–I like buying individuals stocks for the tech sector. They’ve moved alot though-we bought a few weeks ago for the VT portfolio and its been great–although now I wonder how much more upside–still some I do believe, so perhaps a play on XLK may be a good broad play. I like the semi’s in particular–thats where we have a chunk.

      Reply
  • Great articles Keith. Congratulations on calling the bottom of the market. At this point there may be some chop in the US markets before it grinds higher. Are you concerned about sentiment in the short term? In terms of rotation into sectors/stocks with a better risk/reward, what do you think of the retail sector over the next few months?
    Thanks.

    Reply
    • thanks Ron–and yes, the recent intra day activity (up down swings intra day) suggest a change in pace–like you said, some chop to come. I do expect a test of the 2130 area early this winter though. and that is where the real rotation will happen–
      Retail is a big sector, but generally doesn’t look good at this point. Walmart, for eg, looks terrible. However, building supply retail like HD etc look pretty decent. So its a stock pickers market in that area.

      Reply
  • Telecom, utilities, and Canadian bank sectors are declining and it could caused by possible Dec rate hike. Keith, do you like US financial sector or investors should buy those high dividend sectors on this pull back? Thanks for your great insight as always!

    Reply
    • I still like both CDN yield plays like telecom, CDN banks, and certain utilities (excluding energy high yield stocks) and I do own the US banks.
      If rates rise in the US, that will help the US banks and particularly help insurance co’s from a fundamental perspective.
      Rates are not likely to rise here in Canada. There has been a pullback on some of the CDN yield plays, but the breakouts are still in place–eg we own BCE, and it broke out through $55. I am happy so long as it remains above $55. Same with the CDN banks–they broke their downtrends, a pullback is no big deal so long as they don’t break below the breakout point.

      BTW–some very, very smart people who are usually accurate are saying little to no chance of rate hike in December for the Fed. I guess we shall see.

      Reply
  • Keith: I’ve become very interested in tech. analy. lately and you have a way of explaining things clearly. I’ve lost 80% of my wealth doing things the wrong way. I like the idea of letting the graphs tell me what and when to buy. Hopefully, the trend will indeed be my friend. Thanks for all you do. Dave

    Reply
    • Thanks Dave-be sure to read my book Sideways for a step by step guide to trading via TA

      Reply

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