Strange Sector Rotation Underway... For a Bullish Trend

Posted by jbrumley on May 30, 2017 2:04 PM

With stocks still led by the roaring FANG stocks despite Monday's tepid overall action, it's easy to assume the broad rally has no plans to quit anytime soon. Traders have made up their mind to be bullish, and that's that. As they say, you don't want to fight the tape.

A closer look at the market's individual sector performances, however, shows a concerning quirk with the market's current scenario. That is, with the exception of technology stocks, we're not seeing leadership in the right places. Rather, the areas that have been the hottest outside of FANG stocks are areas you'd expect to see when investors are thinking -- and positioning -- defensively by getting into less economically-sensitive stocks.

The performance-comparison chart below tells the tale. Since the end of January, technology stocks have run away. Led by the likes of Amazon (AMZN), Alphabet (GOOGL) and Apple (AAPL), the tech sector has gained a whopping 15.4% in just a little less than four months.

What's curious is the runner-up... utilities. They've gained a respectable 9.3% for the same timeframe. Consumer goods names aren't far behind, with a 7.7% advance. All three of those names still appear to be in uptrends as well, whereas most everything else right now is struggling.


It's an interesting contradiction. The media's rhetoric is mostly bullish, and the all-important technology sector looks unstoppable. The other areas that would benefit most from a rising economic tide though -- industrials, materials, financials -- are all weakening. If investors really believe the future looks brighter than the present (economically speaking), they're not saying so with dollars. They're moving into sectors that tend to be preferred holdings when more compelling growth arenas aren't expected to be all that rewarding.

Don't read too much into the strange disparity. This is more a function of perception and less a function of reality. Indeed, sectors can fall in and out of favor before we even see clear shifts in the underlying fundamental data. On the other hand, sector rotation such as this can inflict a lot of damage or dish out a lot of reward before corporate results start to justify this sector rotation.

In other words, it can pay to think proactively just as much as it pays to think reactively, and this sector rotation chart illustrated the upside and downside of even what seem like short-term moves.

Generally speaking, once a new trend becomes evident on the chart (but before it fully plays out), it usually 'sticks.' That is to say, you can take the breakout thrust from the utilities sector at face value, much like you can take the implosion of the financials and materials names at face value.  Ditto for energy's woes. Technology stocks, on the other hand, aren't in the midst of a fresh breakout. That bullishness is getting a little long in the tooth, and more than anything else those names look ripe for some profit-taking that could prove to be a big drag on them.

Never say never. Sometimes things don't end up becoming what it seems like they're supposed to become. In this case though, there's an awful lot of strange stuff we "shouldn't be" seeing on the chart if things were as bullish as they were supposed to be.