Sector Rotation Model – Today’s Best Sector ETFs

April 26, 2024No Comments


Today, we’re going to talk about some sector rotations. Those who watch my videos and read my blogs have no doubt seen me use a Sector Rotation Model. If you want to see the full details of how this model works, I’d strongly recommend taking my Online Trading Course. I designed it for retail investors to understand how to pick the upcoming winners.  

I did a sector rotation model blog a month or so ago and illustrated that the rotation was beginning to move into things like Materials, Energy and whatnot. And here we are today, on the 15th of April, and those are the exact sectors that have actually seen the money flow move into. So, this is a good model and again, I do highly recommend you take the Online Trading Course because I go into more detail within it. But let’s just look at what I’ve been seeing over the past month. What I am seeing is [00:02:00] a new rotation with some of the old dogs that have worked over the past few months, a couple of new names, and a couple of things that are starting to weaken.


Comparing Two Sector Rotation Models – Mid-February to Mid-April

So, let’s look at the new model. And again, if you know anything about this model before I screen share, you know that I tend to look one month at a time – and one month is 22 trading days. Now you could argue that when there’s 31 days in a month, you might actually have 23 [00:02:30] trading days, or February with 28 days – you have fewer days – but I’m not going to spend a lot of time worrying about those nuances. I always use a 22-day rotation. So, let’s look at the current 22-day rotation versus the prior month. We’ll start with the Sector Rotation Model chart showing the 12th of February to the 13th of March. [00:03:09]

S&P 500 SPDRs

What you can see is that Industrials, Materials, and Energy were getting the majority of the rotation with a little bit into Utilities and Financials. But the rotation was coming out [00:03:30] of Technology, (Consumer Discretionary Mostly), and Communication Services. If you looked a few months earlier than this chart was showing you, you would have seen the opposite. You’d have seen Materials, you’d have seen Energy, you’d have seen Industrials right down in the dumpster, and you’d have seen Discretionaries, Communication Services and Technology outperforming everything. So, there was a real changing of [00:04:00] the guard one month ago, but how is it looking right now? So now, we’re going to look at from the 14th of March until current – the 15th of April.  [00:04:15]

So, what you see here is that Energy has been the mover over the past month. It was one of the movers in the previous months as well, by the way, not just one month. It has been a strong move for the past few months. And the sector rotation, as I mentioned before, clued us into this change two or three months ago. Which is why we started really loading up on Energy not too long ago. Interestingly, you saw the big black Materials bar from the previous month, which was just absolutely outperforming everything. Well, Materials is starting to slow down now. [00:05:00] It is getting closer to the average stock market performance. So, as a reminder, this horizontal line is the S&P 500 – and so if it’s under the line, it’s underperforming the S&P. If it’s over the line, it’s outperforming. 

Now you could have a negative 10% month, but if the market outperformed by 2%, then it would still show 2% up over the line even though it made negative 8%. So, just understand this is a [00:05:30] relative performance line versus an absolute performance line. You see that Consumer Discretionaries are still down, but there has been a little bit of movement in the Communication Services.  But essentially, it’s kind of the same as far as what’s weaker. Technology is still weak, and Discretionary is still weak. Healthcare has become weak, and Real Estate has been weak for some time. [00:06:00] 


Utilities – Sector Rotation Model

The interesting development is the Utilities, which were okay last month. They’re starting to show some real muscle and that tends to be when markets are getting soft, they’re selling off. As I record this, Markets have gone down over the past week or so but Energy is still the strong guy.

What I thought I’d do is just take a look at [00:06:30] Energy in particular because the question is, “Will Energy become like Materials?” (Where Materials were shooting up for two or three months in a row, and then now are coming back to baseline.) They’re not underperforming, they’re still slightly outperforming, but they’re certainly not doing what they did last month. 

So, let’s take a look at XLE, which is the Energy ETF in the US. [00:07:11] So, what you can see here is that the Energy sector, after a very long base – literally since early-’22 – broke out. The breakout is very strong. It’s been a series of white candles. It’s now pulling back basically because everything has pulled back in the past [00:07:30] a couple of weeks, but as you saw in the chart, its pull-back compared to some of the other sectors is a lot less. And in fact, it’s been the top performer. 

So, will Energy do what Materials did this month? I do think it’s got a good chance of pulling back to the neckline. So, this is the Producers vs Oil itself. The neckline on this lands somewhere around the 50-day moving average (10 week), which is this blue line here. Let’s call it $91 [00:08:00]. It’s at $94 right now. This particular ETF could pull back $3 easily, and that’s not too devastating (3 or 4%). So, I do think that this sector has genuinely broken out, and I do think that if Energy pulls back as the market pulls back and you get anywhere near $91 on this ETF – or any equivalent ETF or stocks that you’re looking at – it could be a buying opportunity. 

XLE Energy

At ValueTrend we have been [00:08:30] largely picking our own stocks for the Energy sector because there are some real hot shots in the sector. We do like buying sector ETFs, but in the Energy space we pick our own stocks to a larger degree. And that’s because there are some real discrepancies between the different Energy picks that you can make. We are trying to pick the winners, but nevertheless, the group [00:08:54] itself broke out, looks good, and is likely to pull back a little bit more – maybe 4% [00:09:00] or something like that. And, I think that’ll be a buying opportunity for the Producers.  Again, it’s not a particular endorsement of this ETF at all – I don’t even own it – but it’s more of a commentary on the sector. 

So, that’s how these charts work. When we are looking at performance, we can see what’s happening right now. And if we start to see trends, then we go to the charts and we [00:09:30] ask, “Does this make sense?” If money is moving into that, do we want to own it? For example, if you were looking at Nvidia say three months ago, it would’ve shown the strength. Then you might say, well, I should just buy Nvidia. 

But the problem is, if you went to the chart, it was parabolic. And you cannot say that about the Energy chart. It’s a fairly recent breakout. Yes, there were some white candles. Yes, it’s going to pull back a bit. But, when you compare to some of these [00:10:00] parabolic moves, the problem with the Sector Rotation Model that I use is that you still have to be aware that you need to look at the chart and make sure it’s not a parabolic move that’s about to correct more than just a few percentage points. So, nothing’s ever simple. But again, that’s why I put together the Online Trading Course – because I teach you the full system [00:10:30] on how to do this successfully. 

I’d like to finish up with the suggestion to take a look at our performance numbers as they come out. You will notice that the ValueTrend Equity Platform – which is a very, very conservative platform geared towards capital preservation before anything else – has been very consistent. Although we aren’t printing our April numbers until the end of the month, I can tell you that in the first two [00:11:00] weeks of this month, as the market’s done most of its correcting, we are well ahead of the indices. We tend to do very well when markets are rolling over because we’re rotating and we’re pulling into cash. And we did raise 15% cash just a couple of weeks ago by using the lessons that I teach in my course. We will continue to leg out cash if this correction continues, which I suspect it will.

We too follow our model. [00:11:30] And I think there’s some real opportunity coming as this market corrects, and affords us the ability to buy into sectors like Energy that we’ve had an eye on for a while and would like to either pick up more of – or start an initial position. 

Thanks for watching. See you next week, and if you have questions on the Sector Rotation Model, be sure to post them here.

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