Thinking ahead

January 9, 20233 Comments

Today, I’d like to look at comparative upcoming opportunities in various stocks and sectors. The concepts of identifying current sector rotations, seasonal rotation tendencies, and “regression rotation” (oversold opportunistic) can be used when attempting to identify opportunities. While I remain cautious regarding the overall market outlook (see my last two blogs), its always prudent to keep a shopping list of attractive stocks or sectors in front of you. When the macro’s suggest a favorable market environment, you must prepare to pounce on opportunities.

Looking for oversold bounce or turnarounds in the ARKK innovation stocks

To start, I’d like to direct you to my most recent video. This video covered the “ARKK” fund and its holdings. This fund, run by Cathie Woods, features some of the most innovative growth stocks available. True, the chart of the ETF itself is breaking support–see below. Mind you, a good chunk of that breakdown is attributable to the TSLA weighting. Next: As a regular reader of this blog, you know my view on growth stocks in the current and mid-termed higher inflation/ higher rate environment. I’m bearish on growth. However, there are always opportunities for an oversold trade in a badly beaten stock or sector. In other words, sometimes there are stocks you don’t want to invest in. You want to opportunistically trade them within a confined short time period. This video covers the entire list of ARKK stocks, with my commentary on the stocks that stand out as potential oversold trading opportunities. Click here: ARKK Opportunities – ValueTrend

 

Sector rotation opportunities

In my last blog, here, I noted that the sector rotations seen in the past few years have been right on schedule – aka the rotations we see within a traditional economic cycle. Below is the sector performance chart showing March 2022 (early bear) to a few days ago. Per the economic cycle, it is common to see defensives like staples, healthcare, utilities and hard assets like materials and energy do well as the economy forms a peak. Sectors – aka the market- look forward to what WILL happen, not what IS happening. Note that technology, communications services, and consumer discretionary stocks underperform- again, right on schedule within a classic economic model.

So, if the next step is for recession, there will come a time where the market starts to look forward to recovery from that recession. This will be when we are literally well entrenched in recession. Counter intuitive, isn’t it? At that time, we should see rotation out of staples, healthcare, utilities and hard assets like materials and energy. We will then see rotation into technology, communications services, and consumer discretionary stocks.

Keep in mind a few things regarding the “uniqueness” of the current cycle. I beleive that the current cycle is looking a lot like the 1970’s. Take a look at the longer termed (100 year) Dow chart in my Go Johnny, go! – ValueTrend blog. You’ll see a sideways market, albeit with a bear-low in 1975. That decade had above average inflation. So, true, normally energy wont do so well in recession.  But in a high inflation environment like the 1970’s – things like gold, materials, energy (recall the  oil crisis of the 1970s – brought on by the Yom-Kippur War of 1973 and the Iranian Revolution of 1979) can still do well. My guess is that bad energy policies by idiotic idealist governments in North America capping production and draining reserves – then aided by the Russian situation, will afford strength in those sectors. That, and a re-opening demand for product, which has been subdued due to COVID, within the Chinese economy. Especially in the materials sectors (metals, potash, etc).

So – my point is to look at the charts regularly watching for rotation into technology, communications services, and consumer discretionary stocks. All the while, observe charts in materials in particular. It should be noted that energy has not yet recovered from a neartermed downtrend, so we are underweight that sector for the moment. However, we are building positions within materials. We are NOT yet buying  technology, communications services, and consumer discretionary stocks. But they are on the radar. To learn how to regularly monitor sector rotational changes with a good level of accuracy, take my Online Course.

 

 

Seasonal rotations

Again, we need to keep in mind the current stage in the economy, and the current technical phase in the stock market (read any of my books, or take my Online Trading Course to identify the Base, Bull, Top, Bear phases). Seasonal patterns are generalities, not to be traded on as a stand-alone factor. However, they can offer good guidance, given the stronger seasonal tendencies such as those in energy, technology, materials, staples and a few others. Some seasonal cycles occur consistently enough to warrant our attention. You can find seasonal charts on EquityClock’s website. I also recommend that all investors buy a copy of the Thackray Guide and subscribe to the free newsletter here. Stockcharts.com also offers interactive seasonal bar charts allowing you to measure monthly performance on any sectors over any period of time.

In a nutshell: Most commodities, energy, materials, consumer discretionary, industrials, and transports are in – or are going to be in – their seasonal sweet-spot points between now and the end of February. Most of these sectors I mention are good until the spring.

Putting it all together

If we assume that the market might have a final leg down, per my “Johnny” blog – and then assume that the economic cycle and sector rotational tendencies carries forth in textbook style (as it has…)…and then look at the potential sector rotations, keeping in mind the potential for 1970’s inflation – and then tie it all in with seasonal sector analysis….here is my short list:

  • Keep some exposure to materials, commodities
  • Watch for energy to break its current downtrend
  • Watch for eventual (economic) rotation into industrials, transports, real estate, financials – particularly if market washes out. Not there yet.
  • Watch for shorter termed trading in/out opportunities in ARKK, technology, discretionary and communication stocks. These all suffer in higher inflation higher rate environments so they are bounce-only candidates IMO.

 

 

 

3 Comments

  • exas definitely is on the move to at least $75 maybe to mid 80s. oversold bounce. looks like the recent oversold bounce on tlt.

    Reply
  • As David Chapman said, $usd is breaking down under 103. It sure does! where do you see the next floor? j.p.

    Reply
    • First support is right here in the $102-103 area. If that is broken, I would expect low 90’s

      Reply

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