Assets Continue Moving Into Financials, Aggressively Leaving Technology
Conclusion, Investment Implications, Strategy

This week, the SEAF Model retains its overweight bias in economically sensitive Financials (XLF, since July 8th) and Utilities (XLU, since 7/15) and adds economically sensitive Industrials (XLI).  Meanwhile, Technology (XLK), which had maintained a top-three SEAF ranking for the previous nine weeks, collapsed to the third weakest SEAF ranking last week and had the most aggressive outflows of all sectors in the Trading (weekly) and Tactical (monthly) time frames.

Year-to-date, only Communication Services (XLC) has outperformed the S&P 500 (SPY), and only by 1.7%, which has made profitable sector rotation difficult thus far this year as investor assets continue to jump quickly from sector to sector.  This “jumpiness” indicates investor uncertainty as the market contemplates the future direction of interest rates, the results and implications of the upcoming presidential election, and just how much longer a handful of megacap AI-related stocks can continue to drag the US broad market higher after the S&P 500 has already risen by 38% since October 2023.  Anecdotally, however, we have observed a tendency for periods of sustained indecision in sector rotation like this to lead into more normal periods where one or two sectors have periods of sustained and significant relative outperformance in much the same way that asset prices alternate between trending and non-trending environments.    

Separately, our ETF Trade Ideas, which are selected on the basis of 1) positive price trends, 2) relative outperformance versus the benchmark S&P 500, 3) expanding investor assets, and 4) risk versus reward, currently favor Telecom (XTL), Gold Miners (RING), and Insurance (KIE).  Of our list of 81 sector, industry group, and commodity ETFS that we track, just 12% are currently outperforming the benchmark S&P 500 on a Straegic, quarterly basis: Consumer Discretionary (XLY), Real Estate (XLRE), Capital Markets (KCE), Regional Banks (KRE), Biotech (XBI), Oil Equipment & Services (XES), Homebuilders (XHB), Semiconductors (XSD), Gold Miners (RING), and Silver Miners (SLVP).

Beyond The SEAF Model Video: This Week’s Sector Themes

This weekly video by Jack Kosar, MSF, goes into more detail on the latest SEAF Model data via a heat map that shows where sector-related assets are going, and where they are leaving, in the 11 Sector SPDR ETFs, and also dissects our SEAF “Rainbow Charts” which display the past 12 months of Favored, Neutral, or Avoid rankings in several key market sectors. 

From The Video: This Week’s Major Themes
  • Money continues to aggressively move into Financials in All time frames.
  • Money is moving into Industrials and Energy in the Trading and Tactical time frames.
  • Money is aggressively leaving Technology in the Trading and Tactical time frames.
The SEAF Model: Current Signals & Related Performance

Editor’s Note:  These are the latest specific trading signals generated by our SEAF Model, which also includes a rules-based money management component.  The backtested performance data below is based on trading a predetermined amount of assets with an equal allocation of those assets across the top three Rankings.  The model is updated once per week, on the weekend, and any rebalancing takes place on the market opening the following Monday morning.  This is the recommended way to invest via the SEAF Model.  Contact us for any additional clarification.

In the SEAF Model Graphic below, the Ranking column sorts the entire table of 11 sector ETFs according to the sum of rankings in the Trading (weekly), Tactical (monthly), and Strategic (quarterly) categories, from largest inflows to largest outflows.  The premise of the model is to invest in the sectors that the money is going into and to avoid the sectors the money is coming out of.  

The lower the Ranking number, the stronger the trend of asset flows going into that sector.  The top two sectors in each category, according to a positive change in inflows, are highlighted in green.  The top two sectors in each category, according to a negative change in outflows, are highlighted in red.

Table 1

Click the table to make it larger

Synopsis:  The latest data indicate a multi-timeframe trend of asset inflows into Financials.  This is where the money is currently going in the sector space.  The latest data also indicate multi-timeframe trends of asset outflows from Technology and Healthcare.  This is where the money is coming from.

SEAF Model Individual Sector Charts (“Rainbow Charts”)

The charts below display the weekly SEAF Model Ranking Scores over the previous 12 months for the strongest and weakest sectors through March 7th.  The line in the upper panel displays these weekly scores within the context of being Favored (3-15, green), Neutral (16-24, yellow), or Avoid (25-33, red) and also displays the trend of asset flows as the money moves in and out of these sectors.  The lower panel plots the corresponding weekly relative performance chart of that particular sector versus the S&P 500 (SPY).

Financials: XLF 

Cyclical Financials (XLF), for the second consecutive week, is the SEAF Model’s best-ranked sector with a Ranking score of 3, indicating it is the top-ranked sector in all three time frames.  The upper panel of Chart 2 below shows that Financials moved into Favored Status according to SEAF on Jly 3rd, while the lower boundary shows that XLF has since outperformed the S&P 500 (SPY) by 5%.  The longer Financials retains its Favored ranking, the more likely that its recent trend of relative outperformance versus SPY is likely to continue.

Chart 1

Industrials: XLI

Economically sensitive Industrials is the SEAF Model’s second-best-ranked sector this week with a Ranking score of 11, which represents a huge positive one-week swing from being the second-worst-ranked sector a week earlier with a Ranking score of 28.  The colored highlights in the upper panel of Chart 2 below show that Industrials moved into Favored status on Jly 17th.  The corresponding daily relative performance chart between XLI and the S&P 500 (SPY) in the lower panel shows that the previous relative underperformance trend by XLY bottomed a week earlier, on Jly 10th, and XLI has subsequently outperformed by 5% as the SEAF Model reversed from Avoid status.  As long as Industrials maintains its current Favored ranking, XLI ‘s recent aggressive relative outperformance versus the broad market is likely to continue.

Chart 2

Technology: XLK

Economically sensitive Technology is the SEAF Model’s third-worst ranked sector this week with a Ranking score of 24.  This represents a huge one-week swing from a week earlier when Technology was the third-best-ranked sector with a Ranking score of 13.  This change was driven by a huge exodus of assets from the Trading and Tactical categories last week as both time frames scored the worst possible ranking score of 11  This past two weeks is just a continuation of what has been the norm for most of this year, with investor assets swinging wildly from one sector to another as the market tries to determine when the S&P 500’s huge 38% rise since October 2023 is over.  Since Technology typically leads the US broad market both higher and lower, the more time that XLK remains among the bottom three sectors in the SEAF Model rankings the more likely an overdue US broad market correction will emerge.

Chart 3

Communication Services: XLC

Economically sensitive Communication Services is the SEAF Model’s second worst-ranked sector this week with a Ranking score of 26.  As recently as a month ago, for the week of June 24th, Communication Services was the second-best-ranked sector with a SEAF Ranking of 7.  This is yet another example of the very erratic sector rotation thus far this year as investor assets continue to nervously jump from sector to sector in search of the next trend.  The upper panel of Chart 4 below shows that Communication Services moved into Avoid status on Jly 17th.  The lower panel, which plots the corresponding relative performance of Communication Services versus the broad market S&P 500 (SPY), shows that XLC has underperformed SPY by 4% since Jly 9th, which is when the SEAF ranking started to reverse direction from the Jly 9th peak in Favored ranking.

Chart 4

Sector & Industry Group Trade Ideas: Trend, Relative Performance, Asset Flows

The ETF name and ticker, the date the idea was initiated, the price target, and the price that the idea remains valid above (or valid below if a short idea) are listed for each idea.  The current performance of the idea, both outright and relative to the S&P 500, is also listed. The ideas are listed chronologically, with the newest ideas on top and new ideas or changes highlighted in yellow.  These ideas are intended to identify short-term trading opportunities rather than longer-term investments.

Table 2

More information about the trading ideas presented in this table, including the quantitative performance of these ideas over the past 13 months, is available by Clicking Here.