Investor Asset Flows Remain Erratic As The Market Digests A Fed Easing Cycle
Conclusion, Investment Implications, Strategy

This week, the SEAF Model retains its Sep 9th overweight bias in defensive Consumer Staples (XLP) and adds economically sensitive Industrials (XLI) and cyclical Real Estate (XLRE) to the three best-ranked sectors of the S&P 500 according to the SEAF Model.  The rotation of money around the top five or six sectors, according to SEAF, remains “jumpy” and erratic as the market tries to handicap just how much farther this huge late 2023 broad market advance can extend, even with the Federal Reserve aggressively cutting interest rates.  At the other end of the spectrum, traditionally offensive, “risk on” Technology (XLK) is the worst-ranked sector according to SEAF.

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), the Invesco MSCI Global Timber ETF (CUT), the SPDR S&P Homebuilders ETF (XHB), and the iShares Russell 2000 ETF (IWM).

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 is aggressively moving into Industrials in the Trading time period.
  • Money beginning to move into Consumer Discretionary in the Trading and Tactical time periods.
  • Money continues to aggressively move out of Technology in All time periods.
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 there are currently no multi-timeframe trends of asset inflows into any sector.  

The latest data also indicate multi-timeframe trends of asset outflows from Energy and Technology.  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 September 12th.  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).

Industrials: XLI

Economically sensitive Industrials (XLI) is tied with Real Estate as the SEAF Model’s second-ranked sector this week with a Ranking score of 14.  Prior to this week, XLI’s SEAF Model ranking has resided in the middle to lower part of Table 1 above since Jly 29th.  The rightmost green highlights in the upper panel of Chart 1 below show that Industrials moved into a Favored status on Sep 18th, essentially for the first time since mid-July.  The green highlights in the middle of the chart show that the most recent sustained period of Favored status by Industrials according to SEAF was between Feb 26th and May 21st, which the lower panel shows coincided with a period of relative outperformance by XLI versus the S&P 500 (SPY).  Industrials must maintain their new Favored status for XLI’s recent relative outperformance versus SPY to continue.

Chart 1

Real Estate: XLRE

Cyclical Real Estate is also the SEAF Model’s best-ranked sector this week with a Ranking score of 14.  The green highlights in the upper panel of Chart 2 below show that Real Estate initially moved into Favored status according to the SEAF Model on Jly 23rd, and has remained there since.  The lower panel shows that XLRE has coincidentally outperformed the S&P 500 (SPY) by 14% during this period.  Last week’s 50 basis point cut in the Federal Funds Rate, amid expectations for more cuts later this year, may help to keep Real Estate’s current Favored status intact.

Chart 2

Economically sensitive Technology (XLK) is the SEAF Model’s worst-ranked sector this week with a Ranking score of 29.  The red highlights in Chart 3 below show that Technology has, with few expectations, been on an Avoid ranking according to SEAF since Aug 22nd (upper panel) while XLK has coincidentally underperformed the S&P 500 (SPY, lower panel) by 3%.  At the other end of the spectrum, the green highlights show that a mostly-sustained period of a Favored ranking by SEAF between May 5th and Jly 11th coincided with a period of aggressive relative outperformance by XLK versus SPY.  In our Sep 20th Keys To This Week report we displayed and discussed a bullish chart pattern in the market-leading NASDAQ Composite Index (COMP) that targets a potential additional 13% rise to 20,250.  If this bullish target is to eventually be met,  then Technology must relatively quickly move back to a sustained Favored ranking by the SEAF Model.

Chart 3

Energy: XLE

Economically sensitive Energy (XLE) is the SEAF Model’s second-worst-ranked sector this week with a Ranking score of 22.  More importantly, Energy has also been one of the three worst-ranked sectors of the S&P 50 according to the SEAF Model for 14 of the past 16 weeks beginning on Jun 5th.  Chart 4 below shows that Energy has been on an Avoid status since Aug 13th (upper panel) while XLE has coincidentally underperformed the S&P 500 (SPY) by 8%.  The rightmost part of the chart shows that the SEAF ranking for Energy edged into a Neutral status last week, which is a slight improvement over its recent rankings.  However, it would take a more aggressive change in SEAF, back to a Favored status, to suggest a potential new long/overweight opportunity in Energy.

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.