Saturday, October 19, 2013

Sector Rotation Refresher:

A clip from Getting Technical letter - Interim Update October 7, 2013 GT1413 a refresher on using natural stock sector rotation: The various stock sectors advance and decline in reaction to the expansion and contraction of the business cycle. Typically the “front end” of the market – the Financial, Telecommunications Services and Utilities begin to rise in anticipation of improving business conditions and a low interest rate environment. This stimulates the “middle” of the market and the Technology and Industrial stock sectors begin to rise in anticipation of improved corporate spending. The growing demand for goods stimulates the need for raw materials and the “back end” of the market – Materials, Mining and Energy, begin to advance

As the economy expands, inflation fears trigger higher interest rates and the “front end” of the market peaks in anticipation of a slowdown in consumer spending. As the slowdown becomes evident the “middle” sectors peak as industrial demand slows eventually dragging down the lagging commodity sensitive “back end” stock sectors.

Sector                                     #         
Financials                                Leading - Interest rate sensitive
Telecommunications Service Leading - Economy sensitive
Utilities                                     Leading - Interest rate sensitive
Consumer Discretionary        Coincident - Economy sensitive
Consumer Staples                  Coincident - Defensive
Health Care                             Coincident - Defensive
Information Technology          Coincident - Economy sensitive
Industrials                                Coincident - Economy sensitive
Energy                                     Lagging - Commodity sensitive
Materials                                  Lagging - Commodity sensitive

So here is the problem for the bears – The North American Financials are still leading having posted as a group - new 52 week highs at the close on Friday October 18, 2013. By the way – the last time the SPDR XLF peaked was in May 2007, 5 months ahead of the S&P500 peak of October 2007.

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