Friday, March 29, 2013

A Toppy Canadian Financial Sector

Natural stock sector rotation is due to the forces of the normal business cycle, which is led by the financial and consumer sectors followed by manufacturing and then the cyclical industries. Examples of the current leadership are financial and consumer names such as, Bank Of America Corp., Wells Fargo & Co., J.P. Morgan Chase & Co., Citigroup, Inc., Home Depot Inc. and Walt Disney Co. all recent 52-week highs.

Investors (and their advisors) should know the 10 unique and distinct stock sectors (or asset classes) as set out by Standard & Poor's – energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecommunications services and utilities.

The best way to understand the rotation order is to picture a roller coaster with the financial, utility and consumer sectors riding in the front two or three cars. The next three or four cars will be occupied by the telecom, technology and industrial sectors. And finally, riding in the last few cars would be the energy and materials group.

Picture now the current condition with the leading financial and consumer sectors riding in the front cars slowly climbing to the crest of the ride and eventually slipping over the crest and falling. We would now have a condition with occupants in the front end screaming in fear while the middle and back end cars still are enjoying the climb. Eventually the middle cars crest and you know the rest. The distance in time from the front end to back end is anywhere from 18 to 24 months or about one half or a complete bull market cycle.

Our weekly chart of three banks CM, NA and TD are displaying a potential double top on CIBC – a double top and a recent swing failure on the National and triple top on the TD.

It appears the front end of the market is peaking which is the first phase of an aging bull market. This now opens the door for a strategy that would cause us to reduce the front end sectors (financial & consumer) and to direct the proceeds into the back end sectors such as energy and materials

1 comment:

Eclectic collector said...

Great work, Bill. Further evidence supporting last week's post on the three heavyweight U.S. sectors cyclic commonality and state of the overall bull market.