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Technology Jumps Back To The Best Ranked Sector As Erratic Sector Rotation Continues
Conclusion, Investment Implications, Strategy
This week, the SEAF Model’s three best-ranked sectors are new, with no holdovers from the previous week, as recent frenetic sector rotation continues. This is very atypical behavior according to the SEAF Model and indicates acute indecision under the surface of the S&P 500. Technology (XLK) is the poster boy for recent indecision this week as it is the top-ranked sector in the Trading (weekly) and Tactical (monthly) time frames and also the worst-ranked sector in the Strategic (quarterly) time frame. Technology, which we consider to be the most overt indication of “risk on” in the sector space, has actually been ping-ponging back and forth between a Favored and Avoid SEAF Ranking since August. The other two top-ranked sectors this week are Financials and Industrials.
Editor’ Note: For most of this year, relative performance trends in the sector space have been very small, short-lived, and erratic. This week, for example, the top three SEAF Model scores are sectors that were not in the top three a week ago. This indicates, even though the S&P 500 (SPX) is making new all-time highs, that there is a lot of angst and market indecision underneath the surface of the market. It could be due to the upcoming election, it could be the Fed cutting interest rates. No one knows for sure, and it doesn’t really matter. All that matters is that it’s here, it’s real, and its affecting the market.
Year-to-date, the three best performing Sector SPDR ETFs have been, in order, Utilities (XLU), Communication Services (XLC), and Financials (XLF). Also year-to-date, the SEAF Model’s three most profitable overweight signals have been those very same three sectors, in order. So, the model is working precisely as it should in identifying which sectors to buy. The issue has been that this year’s three best-performing sector ETFs have only outperformed SPX by 3.2%, 2.6%, and 1.8% respectively, and every other sector has underperformed the benchmark index, so — at least so far — there has been very little relative outperformance for SEAF to capture this year. But the reason we consistently follow a model like this is to be in the game when those larger and more lucratize relative outperformance trends emerge.
Year to date, the SEAF Model is currently trailing the S&P 500 by about 5% but with a 3% lower maximum drawdown, a 3% lower standard deviation, and a 50% lower beta. In other words, significantly less risk. And just a few weeks ago, SEAF was outperforming SPX slightly with the very same, much better risk-adjusted numbers. So, don’t get distracted by the noise as the money hops from sector to sector, trying to catch the next “sticky” outperformance trend, but rather focus on the big picture. Since June 2018 through the end of last week, the SEAF Model’s annualized total return has been 7% better than the S&P 500 with a 5% smaller maximum drawdown. The power and the advantage of data-driven investing is not getting knocked off of your long-term game by short-term events.
Beyond The SEAF Model Video: This Week’s Sector Themes
This weekly video by Jack and John Kosar, 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 aggressively moving back into Technology in the Trading and Tactical time periods.
- Money aggressively moving into Financials in the Trading time periods.
- Money aggressively moving out of Utilities and Energy in the Trading time period.
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.
- The SEAF Model exited it’s September 30th long/overweight signal in the Utilities Select Sector SPDR Fund (XLU) on Oct 11th for 1.9% outright loss while underperforming the S&P 500 (SPY) by 2.9%.
- The SEAF Model exited it’s October 7th long/overweight signal in the Energy Select Sector SPDR Fund (XLE) on Oct 11th for 0.7% outright loss while underperforming the S&P 500 (SPY) by 2.8%.
- The SEAF Model exited it’s October 7th long/overweight signal in the Communication Services Select Sector SPDR ETF Fund (XLC) on Oct 11th for 0.9% outright gain while underperforming the S&P 500 (SPY) by 1.1%.
- Effective Monday 10/14, there is a new buy/overweight signal in the Technology Select Sector SPDR Fund (XLK).
- Effective Monday 10/14, there is a new buy/overweight signal in the Financial Select Sector SPDR Fund (XLF).
- Effective Monday 10/14, there is a new buy/overweight signal in the Industrial Select Sector SPDR Fund (XLI).
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.
Click the table to make it larger
Synopsis: The latest data indicate a multi-timeframe trend of asset inflows into Financials and Utilities. This is where the money is currently going in the sector space.
The latest data indicate a multi-timeframe trend of asset outflows out of Communication Services 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 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).
Technology: XLK
Economically sensitive Technology (XLK) is the SEAF Model’s best-ranked sector this week with a Ranking score of 13. This is a relatively high score for the best-ranked sector because all of the aggressive asset flows are coming from the Trading and Tactical time frames, both ranked #1, while XLK is the worst-ranked sector in the Strategic time frame with a ranking score of 11. This is very atypical behavior and indicates acute investor uncertainty below the surface of the market. You can see this in the upper panel of Chart 1 below as it shows the SEAF ranking score has been ping-ponging back and forth between Avoid and Favored status since August. Eventually, this will change and the market will go back to its normal behavior of trending assets that fuel sustained relative performance, as was most recently the case between mid-May and mid-July as XLK outperformed the S&P 500 (SPY) by 4%. In the meantime, we continue to follow the model so we don’t miss the next lucrative trending phase.
Financials: XLF
Cyclical Financials (XLF) is tied with Industrials as the SEAF Model’s second-best-ranked sector this week with a Ranking score of 15, which is another atypically high score for a top-three sector. The rightmost green ellipse in the upper panel of Chart 2 below shows that Financials edged into Favored status according to the SEAF Model at the end of last week. The green rectangle shows that the last time Financials moved into a Favored ranking, back in early July (upper panel), it stayed there until Sep 11th while XLF outperformed the S&P 500 (SPY) by 7%.
Industrials: XLI
Economically sensitive Industrials (XLI) is also the SEAF Model’s second-best-ranked sector this week with a Ranking score of 15. The green highlights in Chart 3 below show that, like Technology, Industrials has been erratically ping-ponging back and forth between a Favored and Avoid status (upper panel) while the XLI has, for the most part, outperformed the S&P 500 (SPY) during this period. Industrials has most recently edged back into Favored status as of Oct 4th. The green rectangle in the middle of the charts shows that Industrials previously spent a sustained period of time in Favored status between Feb 26th and May 20th while XLI coincidentally outperformed SPY by 3%