Thursday, June 15, 2017

The Great Sector Rotation?

We've been hearing a lot about the sector rotation going on with stocks the last week. So I decided to take a look at what's been happening recently, and not as recently. Below are the Sector SPDR ETF's and their performance from the last 10, 40, 100, and 200 days in that respective order.



You'll notice on the top 10 day chart Financials(XLF) have taken a big leadership role this month as expected in a rising rate environment. But if you look back you notice the sector has actually been leading the charge pretty much since last August with a 25%+ gain.  Sure Technology stocks(XLK) have lead admirably themselves, and that's crucial considering it's the largest component of both the Nasdaq, and S&P 500. 

It's not much of a secret Energy stocks have had trouble leading the market since 2015's plunge in oil prices. Yesterdays 3.7% move down isn't going to help with WTI back around $45/brl.  If you recall rising production in the US is responsible in part for low prices.

What really caught my eye is the 100 day chart, which is basically a YTD performance chart.  Notice the identical performance in Tech(XLK), Healthcare(XLV), and Utilities(XLU) with 12% gains.  Not to far behind is Consumer Staples(XLP) with a 9% gain. This is an odd mix of sectors. Generally tech stocks can be a leader during economic expansions as they usually propel productivity gains. Meanwhile Utilities and Consumer Staples are usually considered "defensive", or in other words sectors people cling to during uncertain times due to their perpetual need.  Utilities is also surprising considering it's "rate sensitive" as they rely heavily on borrowing to fund cap-ex. With another hike yesterday from the Fed maybe that will knock the sector down a bit, but it's been no secret rates would be heading higher. Healthcare is a bit of both in my opinion as it toes the line with both camps as a tech leader, and a must have for every person in the world. So this year we currently have 3 out of 4 leading sectors falling in the "defensive" camp.

What I'm getting at is in traditional economic theory Industrial's and Materials should be playing a larger role during expansionary moments. Considering a lot of governments worldwide are talking up infrastructure I bet many would expect these sectors to be near the top of the pack.  It' just isn't so this year.

It seems there is a fine line being drawn behind this rally between risk taking, and a sure thing.
10 Day (June 1 - June 14). Source Stockcharts.com
40 Day(April 13-June 14)

100 Day (January 23 - June 14)

200 Day(August 29 - June 14)


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