Sector rotation: what’s up?

When people greet each other, sometimes we say “What’s up?” as a conversation starter.  The off the wall movie, Night at the Roxbury, had the key characters asking this question as their one-liner in their unsuccessful attempts to ask ladies to dance. In Technical Analysis, we want to ask that same question. We don’t ask “What’s up?” so much to start a conversation, however.  We ask “What’s up” as a question to determine what sector may be seeing some positive rotation. Today, I will examine about 3 months of data covering the major US sectors to see if we can uncover what’s been up, what’s beginning to move up, and finally, what’s now moving down.

How I use sector rotation performance charts

In my Technical Analysis Course, I cover my technique of using the performance charts (which come with a subscription to stockcharts.com) to uncover potential sector rotation in the early stages. While I recommend you take the course to understand how to use this technique and incorporate it into an entire trading plan, I will offer a current view of the perf charts along with my observations.

To start, I’d like to note that you  can use perf charts over any period of time to observe longer or shorter relative strength. My way is not the only way to use these charts, but it has worked for me. Also, please understand that perf charts are relative performance charts. Not absolute. So, if you see a bar showing “2.4%”,  it does not mean the sector made 2.4% over that period. Instead, it means that the sector outperformed the SPX index by 2.4%. Its important to understand this. Here’s why: If the SPX fell, and you see that utilities had a +2.4%  performance bar – you need to take into acount that utilities outperformed the sector by 2.4% but may have still lost money. Finally – you can adjust the perf charts for any lookback period you want. My reasoning behind setting the lookback at 22 days is because, on average, that is how many trading days (30 less 8 weekend days) are in a month. Yes, some months have 28 or 31 days. But the 22 days is a reasonable average to work with.

I tend to compare the prior 22 day period to the recent 22 day period at a minimum to look for rotational clues. Today, I present the past three 22 day blocks.

January 5 – Feb 4

Feb 7 – March 9

March 10-present

Spreadsheet with the results from the above charts

Below is a bit of a spreadsheet drawn from the above. My general observations are to the right. Basically, we are seeing consumer discretionary, materials and real estate improving in relative strength, while energy is weakening. Communication and tech stocks remain weak, while staples, healthcare and utilities remain strong. Financials and industrials are up/down, with no clear rotational trends yet.

Conclusion

As I cover in my Technical Analysis Course, the above information is just a start in the journey. The next steps are to look at the seasonal patterns for the strong and improving sectors. Also, be aware of potential changes due to upcoming and current seasonal patterns of the weaker sectors. From there, we need to do a deep dive into the various sub sectors and individual stocks in each of these major sectors. Its a bit of work, but the results justify it. ValueTrend employs this strategy as part of our stock selection process, and our performance might give you some confidence in its effectiveness. Click here to view our performance page.