Sector rotation model points to materials

One of the many investment tools I present in my Online Trading Course is a sector rotation model. Like everything in that course, I designed the sector rotation model to be a simple, easy to understand tool for ordinary investors to uncover profitable trading ideas. Today, I will cover how the tool works and the current sectors it is pointing towards owning. I’ll also look at the charts of those sectors to give you some thoughts on the buy/sell target points. The point of this exercise is to teach you how to drive by looking forward, rather than by looking in your rear view mirror. Let’s get at it.

Sector rotation model

As noted above, my way of looking at sector rotations is a pretty straight forward approach. I’m looking at the most recent changes in sentiment by comparing the month over month relative performance of the major SPX sector ETF’s. One month may not be indicative of a new trend, but when you combine your observations of new rotations with the charts of those sectors, you have a winning combination.

Each month consists of, on average, 20 trading days. I’m using 21 days to make up for months that have more than 4 weeks. Below is the chart from the previous month’s 21 trading days comparative strength (January 5- February 5th). This chart is not an actual performance chart, it is a relative performance chart. The horizontal line is the SPX. Anything above it outperformed the SPX, and visa versa for below that line. No surprise to see the concentration of performance was entirely in Technology & Communication stocks a month ago.

Big underperformers included Materials, Energy, Utilities, Real Estate. Investors were chasing two sectors (and a handful of stocks) while ignoring most others.

OK. Now lets look at the past 21 trading days.

Recall that the big losers last month were Materials in particular, along with Energy, Utilities and Real Estate. The current rotation seems to be favoring the precise underdogs of last month. Materials, the biggest underperformer last month, are surging. Gold, industrial materials, energy. Real estate too. Its a changing of the guard. Will it last? Next, we need to look at the charts. I’m going to focus on the big reversals – namely Materials, Energy, and Real Estate.

The charts

Below, we’ll look at the materials XLB ETF, the energy XLE ETF, and the real estate XLRE ETF from the performance charts above.

Materials

That’d be yer’ basic breakout. The longer the base, the greater upside. This sector has a monster base. ValueTrend moved a material allocation into Materials over the past few months, as the market raged on about MAG-7’s. Contrarian investing 101. Of note: Materials are also moving right on schedule with their Nov- May seasonal period of strength.

Energy

ValueTrend has also been moving into Energy over the past number of months. The sector is bumping up against 2 year resistance. If that base breaks, expect good things to happen. Energy just entered into its seasonal period of strength (February to May). MACD & MFI look encouraging for that breakout to potentially happen.

Real Estate

The XLRE ETF is showing a trendline breakout, although it is struggling with a strong point of resistance near $40. If we see a breakout through $40, we might see a return to old highs near $48. Hard to say if that will happen, given weak MFI. MACD may be showing some positive momentum. Keep an eye on this chart for a breakout before getting too excited. Seasonality for the Real Estate sector doesn’t enter its period of strength until the summer. So that’s not going for it.

Conclusion

There’s little doubt that materials (mining, metals, chemicals, forestry, gold, etc) are breaking out. Energy is on the cusp of breaking out with some positive momentum signals. Both sectors are in their prime seasonal period right now. Real estate is a bit more “iffy.  Yet, it deserves to be kept on our watch lists if that neckline discussed above cracks.

The sector rotation model, amongst other tools discussed in my Online Course, provides evidence of sectors that could become the next big movers.

Videos

  • I recently posted a video covering literally every major market index (via ETF’s) in the world, looking for new trading ideas. Here’s the link.
  • Anyone notice the breakout on gold recently? I just recorded a video on that breakout, and what it means for investors. Should you be considering investing in either gold bullion ETF’s or gold producer ETF’s? The video should be out in a few days.
  • If you don’t already subscribe to the video’s, you should. I talk about sectors and strategies not covered on this blog. You can subscribe through the ValueTrend Youtube channel, but then you have to tolerate the annoying commercials. Better idea: subscribe here, and have the commercial-free version of the videos sent to your mailbox, just like your subscription to this blog and newsletter.

 

6 Comments

  • What are your thoughts on the US dollar to the Canadian dollar. Is it the time to used Cdn dollar hedged ETF’s or to buy the equivalent in US dollars

    Reply
    • Seasonally, the C$ tends to outperform the USD March to summer–likely because of oil seasonality to get stronger. Now we have the lunatic guilbeault forcing our producers to underperform US producers (see my recent relative strength chart comparisons in video and blog) –that may reduce the outperformance of the loonie vs USD in its normal seasonal outperformance period. C$ Chart shows a very sideways pattern of late. My thoughts are that the currencies may stay within a range of each other, couple of cents on either side.

      Reply
    • Good point Dave
      Stockcharts.com adds in the dividend–which does distort the chart a bit-in this case to the positive. Yahoo and a non-dividend version of stockcharts.com (put an underscore before the ticker on stockcharts) show that XLB is at the old highs but not broken out.

      Yahoo, BTW, is non-logarithmic charting–pretty much useless for chart patterns etc. But they don’t add the dividend, which does give a true indication on of a breakout (or not) per your observation. Either way, cant argue too much with the relative strength rotation–I’d think if things continue, a breakout on a yahoo or non-div chart will materialize for xlb

      Reply
  • Do you think there is a possibility that energy pulls back to support creating another buying opportunity? What is your outlook for the oil price? Thanks.

    Reply
    • Anything can happen. But seasonality and potential rotation per the blog suggest it may be moving up for the next few months. My neartermed target for WTIC is about $85

      Reply

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