Assets Continue Moving Into Financials & Utilities
Conclusion, Investment Implications, Strategy

This week, the SEAF Model once again retains its recent overweight bias in economically sensitive Financials (XLF, since July 8th) and Utilities (XLU, since 7/15) and adds defensive Health Care (XLV) to the model’s top-ranked sectors.  Meanwhile, market-leading Technology (XLK) is once again the SEAF Model’s third-worst-ranked sector while showing the most aggressive outflows of all sectors in the Trading (weekly) and Tactical (monthly) time frame over the previous two weeks.  

Year-to-date, only Financials (XLF) and Communication Services (XLC) have outperformed the S&P 500 (SPY), and by just 1.1% and 0.7%, which has made profitable sector rotation difficult thus far this year as investor assets continue to nervously jump 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 mega-cap 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), Insurance (KIE), and Biotech (IBB).  Of our list of 81 sector, industry group, and commodity ETFs that we track, 35% are currently outperforming the benchmark S&P 500 on a Straegic, quarterly basis, up from just 12% a week earlier.

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 Utilities and Financials in All time frames.
  • Money is beginning to move into Health Care in the Trading and Tactical time frames.
  • Money continues to aggressively leave 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 multi-timeframe trends of asset inflows into Financials and Utilities.  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 Consumer Discretionary.  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) is currently the SEAF Model’s second-best-ranked sector with a Ranking score of 6.  Financials was also the top-ranked sector during the previous two weeks.  The upper panel of Chart 1 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 7%.  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

Health Care: XLV

Defensive Health Care is the SEAF Model’s third-ranked sector this week with a Ranking score of 11.  This represents a huge change in the SEAF Model from just a week earlier when Health Care was the worst-ranked sector with a Ranking score of 28.  This atypically big one-week change was primarily driven by last week’s acute asset inflows in the Trading and Tactical time frames. The green highlights in the upper panel show that XLV moved into Favored status on Jly 24th, while the green highlights in the lower panel show that XLV has already outperformed the S&P 500 (SPY) by 7% since early July.  As long as this huge flow of assets into XLV continues, recent relative sector outperformance by Health Care is likely to continue.

Chart 2

Technology: XLK

Economically sensitive Technology is again the SEAF Model’s third-worst ranked sector this week with a Ranking score of 26.  This represents a huge swing from just three weeks earlier when Technology was the third-best-ranked sector with a Ranking score of 13.  This change was driven by an aggressive exodus of assets from the Trading and Tactical categories for the weeks ending Jly 18th and Jly 25th as both time frames scored the worst possible ranking score of 11.  Chart 3 below shows that XLK has coincidentally underperformed the S&P 500 (SPY) by 6% during this quick shift from Favored status on Jly 11th to Avoid status at the end of last week.  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

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.