Erratic Sector Rotation Indicates Market Uncertainty
Conclusion, Investment Implications, Strategy
As has been the case for much of 2024, the S&P 500 market sectors at the top and the bottom of our SEAF Model rankings this week are atypically split between offensive and defensive sectors. This week, offensive Technology and defensive Utilities (XLU) are ranked #1 and #2, and offensive Consumer Discretionary (XLY) is ranked #11. This erratic, atypical alignment in our model indicates directional indecision as investors appear to be uncertain of whether the recent new all-time high in the S&P 500, on the heels of a huge 31% advance since October 2023, is sustainable.
Separately, our ETF Trade Ideas, which are selected on the basis of 1) positive price trends, 2) relative outperformance versus the benchmark S&P 500, 3) expanding investor assets, and 4) risk versus reward currently favor Telecom (XTL). Note that, of the 72 industry group and commodities-related ETFs that we track ETF for Trade Ideas, just five — Semiconductors (XSD), Telecom (XTL), Silver (SLV), Solar (TAN), and Natural Gas (UNG) — are currently outperforming the S&P 500 on a quarterly, Strategic basis.
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 aggressively moving back into Technology after aggressively leaving it last week.
- Money still aggressively leaving Energy.
- Money is starting to move into Heath Care.
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.
- Since 6/3, the Utilities Select Sector SPDR Fund (XLU) has declined by 2.7% while underperforming the S&P 500 (SPY) by 3.8%.
- Since 5/20, the Technology Select Sector SPDR Fund (XLK) has risen by 0.6% while being a relative performer versus the S&P 500 (SPY).
- Since 5/28, the Communication Services Select Sector SPDR Fund (XLC) has risen by 1.6% while outperforming the S&P 500 (SPY) by 0.8%.
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
Conclusion: The latest data in multiple time frames indicate a multi-timeframe trend of asset inflows into Utilities and Technology. This is where the money is currently going in the sector space. The latest data also indicate multi-timeframe trends of asset outflows from Consumer Discretionary 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).
Technology: XLK
Technology is the SEAF Model’s top-ranked sector this week with a Ranking score of 5. Chart 1 below shows that the SEAF Ranking for offensive Technology has been oscillating back and forth between Favored and Avoid status since March while the relative performance chart of XLK versus the S&P 500 (SPY, lower panel) has been oscillating up and down right along with it as investor assets furiously move into and out of that sector. As Technology typically leads the broad market higher and lower, this underscores the current indecision in the marketplace regarding the sustainability of the current October 2023 uptrend.
Utilities: XLU
Defensive Utilities is the SEAF Model’s second-best-ranked sector this week with a Ranking score of 6 and has been one of the three best-ranked sectors for 5 of the past 6 weeks. This is very atypical market behavior while the benchmark S&P 500 is trading at all-time highs. The green highlights in Chart 1 below show that Utilities moved into Favored status on Apr 30th (upper panel) and has essentially remained there since. Also note that this is currently the highest SEAF ranking that Utilities has seen over the past 12 months. Since Utilities is typically a defensive choice in the stock market, recent aggressive asset inflows into XLU suggest that some investors may be preparing for a bearish reversal in the currently overextended US broad market.
Consumer Discretionary: XLY
Offensive Consumer Discretionary is the SEAF Model’s worst-ranked sector this week with a Ranking score of 29, and has been one of the SEAF Model’s 3 weakest sectors for the past 5 weeks. The key takeaway again this week is that both historically offensive and defensive sectors are appearing at the top and the bottom of our SEAF Model rankings, which indicates directional indecision on broad market direction. The red highlights in Chart 3 below show that Consumer Discretionary moved into Avoid status on May 6th while XLY has coincidentally underperformed the S&P 500 (SPY, lower panel) by 4%.
Energy: XLE
Energy is the SEAF Model’s second-worst-ranked sector this week with a Ranking score of 26, and has been one of the SEAF Model’s 3 weakest sectors for 4 of the past 5 weeks. The rightmost red highlights in Chart 4 below show that Energy moved into an avoid Ranking on Jun 5 after languishing in a Neutral status since May. The red highlights in the middle of the chart show that Energy was previously on an Avoid status between Nov 7th and Mar 7th while XLE coincidentally underperformed the S&P 500 (SPY, lower panel) by 5%.
Sector & Industry Group Trade Ideas: Trend, Relative Performance, Asset Flows
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.