Today’s hero becomes tomorrows zero.

I’ve referred to the market over the past few 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. It is for this reason that I believe in truly active management of your portfolio –whether you do it for yourself, or you hire an active (i.e. NOT buy and hold!) manager to do it for you. I’ve created a little mantra that may help you remember to rotate your sectors in markets as we move forward:

 

“Today’s hero becomes tomorrows zero.”

 

I’d like to suggest that there is a high potential for continued rotation from the current favorites (“hero’s”) of US technology, Industrials, and Financial stocks into other sectors. At this time, those sectors have been the place to be. Interestingly, the Financials on both sides of the border have already begun to underperform. Time doesn’t stand still, and money never sleeps. I’ll be watching for signs of a change in trend and moneyflow into the currently flat or losing sectors and stocks (the  “zero’s”).

Below, I’d like to highlight the past 3 years of rotation in one year increments from May to May. I could have easily gone back further to illustrate my point, but 3 years of data will give you the general idea. I’ve used the Stockcharts.com “Prefchart” feature to show performance of the 9 major S&P sectors.

A brief history of time, space, and sector rotation.

May 2014 – May 2015

Performance Chart of S&P sector ETFs from May 2014 to May 2015

As you will see on this chart, the leading sectors in that time period were Healthcare (up almost 18%) and Cyclicals (up 8%). The underperformers were Energy (down 25 %!) and Industrials (down 4.5%). Materials were down 4% as well.

 

May 2015 – May 2016

Sector Rotation: Performance Chart of S&P sector ETFs from May 2015 to June 2016

Very different than the 2014 – 2015 period, it was Consumer Staples (up 12%) and Utilities (up 15%!) that lead the charge in this rotation. Cyclicals continued to do well (up 5.7%) while materials were down another 4.7%. Energy repeated its lousy performance with another horrid loss of 11.7%. Of interest was the abrupt reversal of Healthcare from top dog in the prior period to a 2.6% loss over this 12 month period. I’d also like you to take note that in this period, Technology (up 4%), Industrials (up 2.8%) and Financials (down 0.8%) were relatively uninspired performers over this 12month period.

 

May 2016 to May 2017

Sector Rotation: Performance chart of S&P Sector ETFs from May 2016 to May 2017

What a difference a year makes. On this rotation, we saw Technology (up 16.6%), Financials (up 10%) and Industrials (up 7.3%) as the movers and shakers. Remember how Healthcare was the best place to be just 2 years prior, and Staples and Utilities were the leading sectors in the last 12 month period? Well, guess where they are now? Staples are down 7.4%, Utilities are down 2.5% and Healthcare is sucking wind at a 6.6% loss. Yesterday’s hero, once again becoming todays zero.

Energy…yesterday and today’s “zero”

I believe that oil, and energy related stocks, are in the process of basing. They are not buys at this time, and may not be for another couple of years. They are merely “watch” candidates. At this time- oil is trying to put in a bottom. When will it break out? You and I can’t say. It’s much too early to make such a prediction. 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.

WTI Crude Oil monthly chart from 2013 to May 2017 show base formation and a complex bottom

 

Staples – a “zero” that’s becoming a “hero”

 

The consumer staples sector in the US contains such stalwarts as Proctor and Gamble, Philip Morris, Coca Cola and Colgate Palmolive. In Canada, companies like Loblaw, Alimentation Couche Tard, and Metro are considered staples. The chart looks good for both the SPDR US Staples ETF (XLP-US).  A Canadian ETF that nicely represents the Canadian stocks is the iShares Consumer Staples ETF (XST-T). As an added bonus, Consumer Staples are considered seasonally attractive from May to October.

Consumer Staples ETF - monthly chart from 2013 to May 2017 as the ETF is about to enter its seasonally attractive period

Heathcare – still a “zero”, but watch for a breakout

Great healthcare stocks like Johnson and Johnson, Pfizer, United Healthgroup and Gilead Sciences are represented in this group. Better to play the US side if you enter this sector, as the Canadian side is just too small. The benchmark ETF SPDR Healthcare (XLV-US) has been pretty flat since 2014. But a breakout through $76/ share might indicate a rotation back into that sector. Keep an eye on this one – its pretty close to that price as I write this blog.

Healthcare sector ETF chart from 2013 to May 2017 with potential for breakout

Keith on BNN

I will be on BNN’s call-in show MarketCall on Monday June 12th from 1:00pm to 2:00pm. Tune in to BNN to catch me live on BNN’s premier call-in show, where viewers like yourself can ask my technical opinion on the stocks you hold.

Call in with questions during the show’s live taping between 1:00 and 2:00 pm. The toll free number for questions is 1 855 326 6266. You can also email questions ahead of time to [email protected] – it’s important that you specify the question is for me.

9 Comments

  • Hi Keith,

    Thanks for sharing your insights with everyone. I noticed the ticker for the Canadian iShares Consumer Staples ETF (XSP-T) has a typo, I believe it should be XST-T.

    Josh

    Reply
    • Oops!–thanks for letting me know Josh–I’m going to edit the blog to reflect that mistake

      Reply
  • Hi Keith,
    Could you discuss what you mean by “cyclical” stocks? I am not sure what category they are in. Thanks.

    John

    Reply
    • Mostly materials and consumer products is the definition according to most sources.

      Reply
  • Keith:
    It appears that the povided sector performance charts in you report show the relative performance of sector ETFs compared to the S&P500. Actual performance of sectors during the period of observation would be somewhat different.

    Reply
    • Thanks for that Rudi, I didn’t notice this–appreciate the insight–although the observation of rotation remains the same.

      Reply
  • I was wondering what your thoughts were on First Trust Dorsey Wright U.S. Sector Rotation Index ETF (CAD-Hedged) TSX:FSR. I see Stockcharts does not have a symbol for this ETF on the $TSX to view. I do see it on the Nasdaq though with the symbol FV. It simply holds the top 3 Sectors at all times. Seems like a good & simple idea to me but would like to know your thoughts on this ETF are,thanks.

    Reply
    • I don’t know anything of their methodology but I was able to chart the FV-US units on my Thomson charts. Basically, the ETF peaked in July 2015 and declined steadily to February 2016 – from there it has slowly risen to its July 2015 highs–its actually still a tad below them–thus it is still in a minor negative, but I am not including dividends. So perhaps I am inaccurate in that statement by a bit. Given that the S&P500 has risen about 14% since that time (not including dividends) you are looking at a strategy that–at least for this period–has likely not been too effective as an outperformer, let alone a market performer.

      Reply
      • The FV outperformed the $SPX from March 2014 to September 2015. But while it did underperform from then to February 2016 it has held up well relative to the $SPX since then. My point was mainly that the concept of staying in the top 3 sectors was a good one with the main issue to deal with on occasion was a major correction where everything sells off. Then the top 3 would only fall less than the other sectors but still fall of course. That is where some basic technicals would always be needed for an exit strategy of even the top 3 sectors and sit in cash. But I was impressed with the price chart overall of FV and the overall concept of the ETF.

        http://stockcharts.com/h-sc/ui?s=FV&p=D&yr=3&mn=4&dy=0&id=p72891215456&a=526853276

        Reply

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