SEAF’s Top-Ranked Sectors Remain Defensive
Conclusion, Investment Implications, Strategy

This week, the SEAF Model retains its recent overweight bias in cyclical Financials (XLF, since 8/19) and adds two defensive sectors, Consumer Staples (XLP) and Utilities (XLU), to its top three rankings. We also note that Real Estate (XLRE) and also-defensive Health Care (XLV) has also been ranked among the top five sectors since late July.  At the other end of the spectrum, offensive, “risk on” sectors Technology (XLK) and Communication Services (XLC) are among the three worst-ranked sectors according to SEAF.  Collectively, these latest data suggest that investors have for weeks been positioned for a significant market decline, perhaps due to a slowing US economy amid rising unemployment.

Separately, our ETF Trade Ideas,  selected based on 1) positive price trends, 2) relative outperformance versus the benchmark S&P 500, 3) expanding investor assets, and 4) risk versus reward, currently favor the SPDR Gold Shares ETF (GLD), the SPDR S&P Telecom ETF (XTL), and the Invesco MSCI Global Timber ETF (CUT).   

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 aggressively moving back into Consumer Staples in All time frames.
  • Money aggressively moving out of Technology in the Trading and Strategic 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 Consumer Staples.  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 Energy.  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 top-ranked sector with a Ranking score of 5.  Financials has been one of the three best-ranked sectors of the S&P 500 according to the SEAF Model for the past nine of 10 weeks beginning on Jly 8th.  Chart 1 below shows that Financials has essentially maintained a Favored SEAF Ranking since Jly 2nd (upper panel) while XLF has coincidentally outperformed the S&P 500 (SPY, lower panel) by 11%.

Chart 1

Consumer Staples: XLP

Defensive Consumer Staples (XLP) is the SEAF Model’s second-ranked sector this week with a Ranking score of 6.  The green highlights in the upper panel of Chart 2 below show Staples most recently moved into Favored status on Sep 3rd.  The lower panel shows that XLP has coincidentally outperformed the S&P 500 (SPY, lower panel) by 5%.  Also noteworthy is that Staples’ current SEAF Ranking of 6 is that sector’s best score over the past year.

Chart 2

Utilities: XLU

Defensive Utilities (XLU)  is the SEAF Model’s third-ranked sector this week with a Ranking score of 9.  XLU has also been one of the three best-ranked sectors of the S&P 500 according to the SEAF Model for eight of the past nine weeks beginning on Jly 15th.  Chart 3 below shows that Utilities has been on a Favored status according to SEAF since Jly 18th (upper panel) while XLU has coincidentally outperformed the the benchmark S&P 500 (SPY) by 13%.

Chart 3

Energy: XLE

Economically sensitive Energy (XLE) is the SEAF Model’s worst-ranked sector this week with a Ranking score of 31.  More importantly, Energy has also been one of the three worst-ranked sectors of the S&P 50 according to the SEAF Model for 12 of the past 14 weeks beginning Jun 5th.  Chart 4 below shows that Energy has, for the most part, been on an Avoid or Neutral status since Jun 5th (upper panel) while XLE has coincidentally underperformed the S&P 500 (SPY) by 10%.

Chart 4

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

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 16 months, is available by Clicking Here.