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Technology Retains Top Ranking Despite Aggressive Outflows Last Week
Conclusion, Investment Implications, Strategy

This week, the SEAF Model’s three best-ranked sectors are, in order, Communication Services (XLC), Technology (XLK), and Consumer Discretionary (XLY).  XLK is the only holdover this week and has been one of the SEAF Model’s top-three-ranked sectors since December 9th.  Note that all three are generally seen as more aggressive “risk-on” sectors.  At the other end of the spectrum, Industrials (XLI), Health Care (XLV), and Energy (XLE) are, in order, the three lowest-ranked sectors.  However, notice the erratic asset flows within the bottom three as 2024 bottom dwellers Health Care and Energy jumped up to the top two sectors in the Trading (weekly) time frame last week, while Industrials collapsed to the second weakest sector in that same category following a top-three overall ranking a week earlier.

Editor’s Note, 1-4-2025:  In a very difficult year for sector rotation strategies, as there were no sustained outperformance trends in any sector, the SEAF Model finished 2024 trailing the S&P 500 by just 1.9%.  However, it did so with a 45% smaller maximum drawdown, a 35% lower beta, and a slightly lower standard deviation.  This means SEAF produced essentially the same performance as the S&P 500 but with significantly less risk. 

Bigger picture, since inception in June 2018, SEAF has outperformed the S&P 500 by 8.1% on an annualized basis with a 13% smaller maximum drawdown and a slightly lower beta.  Moreover, we have significantly outperformed our peers, other ETFs that implement a sector rotation strategy, during this 6 1/2 year time period. 

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 into Communication Services in All time periods.
  • Money aggressively remains in Technology in the Tactical and Strategic time periods.
  • Money aggressively moving into Energy and Health Care 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.

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

The latest data indicate a multi-timeframe trend of asset inflows into Technology.  This is where the money is currently going in the sector space.

The latest data also indicate a multi-timeframe trend of asset outflows out of 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).

Communication Services (XLC)

Economically sensitive Communication Services (XLC) is the SEAF Model’s top-ranked sector this week with a Ranking score of 10.  The green highlights in the upper panel show that XLC initially moved into Favored status on Nov 12th and, despite tests of this ranking on Nov 22nd and Dec 26th, has remained there since.  The lower panel shows that XLC has coincidentally outperformed the benchmark S&P 500 (SPY) by 3% as these relatively aggressive asset inflows have driven the price of the ETF higher.

Chart 1

Technology: XLK

Economically sensitive Technology (XLK) is the SEAF Model’s second-best-ranked sector this week with a Ranking score of 14.  The green highlights show that Technology initially moved into Favored status on Dec 4th (upper panel) while XLK has coincidentally outperformed the benchmark S&P 500 (SPY) by 2%.  Technology is currently testing the lower edge of Favored status now, which we view as a Tactical decision point for the sector.  Also notice how XLK has been erratically ping-ponging back and forth between Favored and Avoid status since August.  This is an indication of investor indecision on market direction over the past five months, as Technology is a measure of investor risk appetite and typically leads the broad market both higher and lower.

Chart 2

Consumer Discretionary: XLY

Cyclical Consumer Discretionary (XLY) is the SEAF Model’s third best-ranked sector this week with a Ranking score of 15.  The green highlights in Chart 3 below show that Consumer Discretionary initially moved into Favored status on Oct 24th (upper panel) while XLY has coincidentally outperformed the benchmark S&P 500 (SPY) by 10%.  Note that Consumer Discretionary has been testing the lower edge of Favored status since Dec 26th while relative outperformance by XLY has stalled.  If the larger trend of relative outperformance by XLY is to remain intact, then we should see it move deeper into Favored status in the weeks ahead.

Chart 3