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Sector Rotation Tells the Tale

by Ryan Puplava, Financial Sense:

The S&P 500 closed at 1432.12 today, a new 52-week high as well as a 4-year high since the market recovery began in 2009; however, not every stock in the S&P 500 is hitting 52-week highs. As always, there is an ebb and flow to the market, and the sector rotation model tells the market tale. Very simply put, I wanted to skip the central bank theatrics, the economic extraction, and bull/bear bias by simply telling the market performance story. I want to tell you, “what’s working” and by telling you what’s working, deduce where the market is anticipating the economy is going.

Sector Rotation states that different sectors perform for better or worse, based on the highs and low of the economic cycle. When utilities, healthcare, and staples outperform the market, portfolio managers are shifting their allocations into a defensive posture as the economy shows signs of weakening economic activity. When technology stocks and consumer retail stocks outperform, portfolio managers are shifting weightings in anticipation of a market bottom and a recovery in economic activity. Finally, when basic materials, energy, and industrials outperform it’s because investors are anticipating the economy is in full recovery and resource supply is getting tight relative to demand. Martin Pring and John Murphy have put together a diagram that depicts this relationship on stockcharts.com, shown below.

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