Quick Sector Rotation Insights From The September Low (XLE, SPY)

The S&P 500 (NYSE:SPY) bottomed (recent swing low) at the 1,040 level at the end of August/start of September and has rallied almost non-stop to the 1,230 area.

Two quick questions come to mind – how have the individual sectors performed, and what does this say about the broader market?

Let’s take a look:

When doing any sort of Sector Comparison, it’s best to start with a grouping of sectors into two categories – the OFFENSIVE (or aggressive) sectors and the DEFENSIVE sectors.

I always make that distinction when I do Sector Rotation updates.

Offensive Sectors – as shown through AMEX Sector SPDRs – include Financials, Consumer Discretionary, Technology, Industrials, and Materials.

As you can see from the grid above (via StockCharts), the Offensive Sectors have in some case almost doubled the percentage gains of the Defensive Sectors (Consumer Staples, Health Care, and Utilities).

That’s what you’d expect, and it suggests bullish strength for the broader market – as in, according to the model, this is what you would expect to see from a broad Bullish Expansion phase.

Of course, there is one little outlier and it’s the Energy (NYSE:XLE) sector, which is up 23% from the late September lows (to present).

According to the Sector Rotation Model, when energy is the best performer, it’s usually a danger or caution sign, as energy prices start to ‘overheat’ in the midst of a broad expansion which serves almost as a tax on consumers and businesses.

It’s something to keep an eye on, but for the moment – or at least looking at the early September to mid-November rally – the Model is showing bullish confirming strength.

It suggests that – as long as the rally continues – investors would look to be positioned in the Offensive Sectors, though what happens at the key resistance at 1,230 is key.

A firm break above 1,230 is a call for repositioning bullishly (according to the model), given that price could stall at the key 1,230 level.  It’s an example of how to combine index expectations and key levels with the Sector Rotation Model (which gives a broader look at the S&P 500 Index).

Keep a watch on Energy and the Offensive Sectors – and leading stocks in those sectors – until proven otherwise.

Written By Corey Rosenbloom, CMT From Afraid To Trade  

My name is Corey Rosenbloom, CMT (Chartered Market Technician) trader, educator, analyst, and I am excited to share with you my experiences studying and trading the markets and to hear from you regarding your experiences, challenges, and frustrations, and successes. My goal is to create a community dedicated to reaching out to those who have been burned by the market or are anxious about risking their money to make money in the stock, options, or futures markets. Together, we can share strategies and learn how to overcome crippling fears that keep us from achieving our highest potential.

Leave a Reply

Your email address will not be published. Required fields are marked *