Sector rotation: what’s up?

April 11, 20224 Comments

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.

quote-teal

4 Comments

  • I noticed you have energy as weakening, which by the way I concur. However Nat gas is strengthening. Would you consider continuing holding gassy stocks like Tourmaline, Arc, Birchcliff etc. I’m assuming you are referring to oily stocks.

    Reply
    • Actually Dave, I like Nat gas too. I will disclose that we hold two of your stocks mentioned. As noted on my Frogs rant, oil is rounding over from an overbought state.
      Gas is currently parabolic and overbought. I suspect it too will find a point soon where it pulls back. Having said that – gas itself may have even more upside than oil over the longer term. Look at the high points in the mid 2000’s. Gas is – from an environmental perspective, relatively cleaner than oil. So there’s that in its favor too.
      So – my view is for the potential of neartermed pain in both oil and gas (Ukraine war can prolong the time before a pullback). But looking out, it makes sense for energy to be a good position in a portfolio in my eyes.

      Reply
  • Keith, I also thought back in 2020 that oil isn’t going out of style when we stopped driving and it would be a great opportunity to buy the producers but unfortunately, I wasn’t reading your blog to help confirm my thesis and follow through. With oil having pulled back to the trendline and considering that some producers can still triple/quadruple from here to reach their record highs (heck some are still below book value according to sites I’m looking at), would you say it’s too late/risky to get in now?

    Regarding your REIT note yesterday, a REIT showed up in my 52-week low screen last week and thought the same as oil two years ago, that the sector might be worth legging into but don’t have to conviction to buy. I thought high interest rates were not good for REITs though.

    In hindsight, I would be much richer had I actually bought the stocks about which I thought this would be a great time to buy.

    Reply
    • George–as noted, I do think oil could pull back. But to your point–the producers have TONS of upside – interm corrections aside. So, we reduced our oil a while ago by going from 15% exposure to 11%. If I was convinced the story was over or that its too late to make any more profits, I would have sold the entire allocation. I would think that, should we get a bit more downside of oil, it might be a great re-entry.
      And yes, REIT’s like utilities can be negatively impacted by rates rising. However, charts-is-charts, and they are fruit not ready for picking yet. Beyond one small position in our income platform we don’t have any exposure in our equity platforms to REITs yet. So my video was more of a “keep an eye” conversation, not a “run out and buy” suggestion. I will buy if the technical signals play out.
      Isn’t technical analysis great? You don’t have to follow a theme or a concept. You just go with the flow! I don’t fight the market. The market informs me on what it wants to do. Who are we to argue?

      Reply

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