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Financials The Latest Top Ranked Sector As Investors Scramble Before The Election
Conclusion, Investment Implications, Strategy

Two of the SEAF Model’s three top-ranked sectors are new this week — Utilities (XLU) and Real Estate (XLRE) – while Financials (XLF) has retained its position as a top-three-ranked sector.  The recent absence of a sustained top-three-ranked sector according to SEAF is historically very atypical based on our data since 2018.  We believe this anomaly in the data indicates investor indecision/caution due to the significantly different economic outcomes that many top economists have predicted depending on who wins the election. 

What has been apparent, however, is the frenetic rotation among the top five ranked sectors — Financials (XLF), Utilities (XLU), Real Estate (XLRE), Technology (XLK), and Industrials (XLI) — while the bottom three — Energy (XLE), Health Care (XLV), and Communication Services (XLC) — have mostly been shunned.  We believe that once we elect a new President and economic policies become more clear, the investor asset flows that fuel sector rotation will go back to their historically normal trending behavior.

10-14-2024 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 continues to aggressively move into Financials in All time periods.
  • Money aggressively moving into Utilities in the Trading and Strategic time periods.
  • Money aggressively moving out of Communication Services and Health Care 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 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).

Financials: XLF

Cyclical Financials (XLF) is the SEAF Model’s top-ranked sector this week with a Ranking score of 6.  Financials has been ranked among the top three sectors by the SEAF Model for six of the past 10 weeks beginning Aug 19th and is the strongest sector of the S&P 500 year-to-date versus the S&P 500.  The rightmost green highlights in Chart 1 below show that Financials has most recently edged back into Favored status on Oct 11th (upper panel) and has aggressively outperformed the S&P 500 (SPY, lower panel) since then.  The green rectangle shows that the previous 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%.  

Chart 1

Utilities: XLU

Defensive Utilities (XLU) is the SEAF Model’s second-ranked sector this week with a Ranking score of 12.  Utilities has been one of the top-three-ranked Sectors according to the SEAF Model for 12 of the past 15 weeks beginning on Jly 15th and is currently the strongest sector of the S&P 500, year-to-date, versus the S&P 500.  The green rectangle in Chart 2 below shows that Utilities most recently resided in Favored status between mid-July and late September while outperforming the S&P 500 (SPY, lower panel) by 16% during that period.  

Chart 2

Real Estate: XLRE

Cyclical Real Estate is the SEAF Model’s third-best-ranked sector this week with a Ranking score of 13.  Real Estate has been  hanging around the top-ranked sectors according to the SEAF Model since mid-Summer as it has been among the top-four-ranked sectors for 14 of the past 16 weeks.  The rightmost green highlights show that Real Estate has most recently had a sustained stay in Favored status, between late July and early October, while XLU has coincidentally outperformed the S&P 500 (SPY) by 6%.  The Real Estate Sector is significantly influenced by the direction of long-term interest rates.

Chart 3