Erratic Rotation Continues Around Stronger Technology, Comm Services
Conclusion, Investment Implications, Strategy

Technology (XLK) and Communication Services (XLC) are the only two sectors of the S&P 500 that have outperformed the S&P 500 Trust ETF (SPY) year-to-date, but just barely, by 3.1% and 3.4%.  During this period, XLK has maintained a top-three SEAF Model ranking for 17 of the past 27 weeks, while Communication Services (XLC) has had a top-three SEAF Ranking for 15 of those 27 weeks.  At the other end of the spectrum, Health Care (XLV) has maintained one of the three worst SEAF Rankings for 12 of the past 16 weeks beginning in mid-March, while XLV has underperformed the S&P 500 by 6.0%.  The first half of this year has been atypical because of the lack of a sustained trend of asset inflows into any one sector, which has resulted in the lack of a large enough trend of relative outperformance by any sector to be significantly lucrative.  But, anecdotally, we have observed a tendency for periods of sustained indecision in sector rotation like this one to lead into more normal periods where one or two sectors have periods of sustained and significant relative outperformance, in the same way that asset prices alternate between trending and non-trending environments.

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 only Telecom (XTL).   This is because, of the 83 market sectors, industry groups, and commodities-related ETFs that we track for our ETF Trade Ideas, just four — Technology (XNTK, XLK), Semiconductors (XSD), Telecom (XTK), and Software (IGV)  — all within the Technology space, are currently outperforming the S&P 500 on a quarterly, Strategic basis.  This is also very atypical market behavior and the reason why there aren’t any additional names populating our table right now.

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 moving into Consumer Discretionary in the Trading and Tactical time frames.
  • Money starting to move out of Technology in the Trading time frame.
  • Money starting to move into Energy and Financials in the Trading time frame.
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

Conclusion:  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 from 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).

Communication Services: XLC 

Offensive Communication Services (XLC) is the SEAF Model’s second-best-ranked sector this week with a Ranking score of 13.  This sector has had a top three SEAF Model ranking for 15 of the 27 weeks thus far this year and, with Technology, is one of just two sectors (with Technology) that have outperformed the S&P 500 during this period.  The upper panel of Chart 1 below shows that Communication Services moved into Favored Status according to SEAF on May 23rd and, with the exception of a one-day dip into Neutral status on Jun 24th, has remained there since.  The lower panel shows that XLC has coincidentally outperformed S&P 500 (SPY) during this same period.  The longer that Communication Services maintains its current Favored status within SEAF, the more likely that XLC will continue to outperform SPY this year.

Chart 1

Technology: XLK

Offensive Technology is the SEAF Model’s second-best-ranked sector this week with a Ranking score of 13.  Technology has had a top three SEAF Model ranking for 17 of the 27 weeks thus far this year and is just one of two sectors (with Communication Services) that have outperformed the S&P 500 year-to-date.  The upper panel of Chart 1 below shows that, with the exception of a very brief period around Jun 4th, the SEAF Ranking for offensive Technology has been in Favored status since May 15th.  The lower panel shows that XLK has outperformed the S&P 500 (SPY) by 5% since then.  As long as Technology retains its Favored status, XLK’s recent relative outperformance is likely to continue.

Chart 2

Materials: XLB

Cyclical Materials is the SEAF Model’s worst-ranked sector this week with a Ranking score of 26.  The gold/yellow highlights in Chart 3 below show that Materials dropped out of Favored status and into Neutral status on May 2nd and then declined further into Avoid status on Jun 14th per the red highlights, remaining in Neutral or Avoid status since then.  The red highlights in the lower panel show that XLB has coincidentally underperformed the S&P 500 (SPY) by 12% during this same period.  Note that with few exceptions, Materials has maintained its Neutral or Avoid status throughout the past year while XLB has consistently underperformed the broad market.  It would take a sustained move into a Favored SEAF ranking to suggest a buy/overweight opportunity in Materials.

Chart 3

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.

Table 2


More information about the trading ideas presented in this table, including the quantitative performance of these ideas over the past 13 months, is available by Clicking Here.