Technology Retains Its Top-Three Ranking While The Rest Of The Market Indicates Uncertainty
Conclusion, Investment Implications, Strategy

This week, the SEAF Model retains its May 20th overweight in Technology (XLK) and adds Consumer Discretionary (XLY) and Financials (XLF) to its top-three ranking.  Technology 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, by 4.3% and 4.1%.  However, during this period XLK has maintained a top-three SEAF Model ranking for just 18 of the 28 weeks thus far this year (64% of the time) as investor assets continue to quickly jump from sector to sector.  This indicates investor uncertainty as the market contemplates the future direction of interest rates, the upcoming presidential election, and how much longer a handful of megacap AI-related stocks can continue to drag the US broad market higher after the S&P 500 has already risen by 36% since late October 2023.  But, anecdotally, we have observed a tendency for periods of sustained indecision in sector rotation like this 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 Telecom (XTL), S&P Growth (SPYG), and NYSE Technology (NYSE).  We are also closely watching mining stocks as they are once again flirting with a major bullish breakout.

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 continues to aggressively move into Technology in all time frames.
  • Money has recently been moving into Consumer Discretionary in the Trading and Tactical time frames.
  • Money starting to move into Financials in the Trading and Strategic time frames.
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 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 Energy and Health Care.  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

Offensive Technology is the SEAF Model’s top-ranked sector this week with a Ranking score of 3, which is the highest score possible.  Technology has had a top three SEAF Model ranking for 18 of the 28 weeks thus far this year (just 64% of the time) 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 1

Financials: XLF 

Cyclical Financials (XLF) is the SEAF Model’s second-best-ranked sector this week with a Ranking score of 10.  Note last week’s strong showing in the Trading time frame with a SEAF Ranking of 2, second only to Technology.  The upper panel of Chart 2 below shows that Financials moved into Favored Status according to SEAF on Jly 2nd.  The longer it retains its Favored ranking, the more likely that Financials’ recently-improving asset flows are likely to result in relative outperformance versus the S&P 500 (SPY).  The green rectangle in the middle of the chart shows that a sustained Favored ranking between November 2023 and March (upper panel) fueled relative outperformance by XLF versus SPY during that period.

Chart 2

Health Care: XLV

Defensive Health Care is the SEAF Model’s worst-ranked sector this week with a Ranking score of 32, and has been one of the SEAF Model’s 3 weakest sectors for 13 of the past 17 weeks (76% of the time) beginning on Mar 18th.  Chart 3 below shows that, with the exception of brief moves into a Neutral SEAF Ranking in mid-May and in early and late June, Health Care has been on an Avoid Ranking since Mar 13th (upper panel) while XLV has coincidentally underperformed the benchmark S&P 500 (SPY, lower panel) by 8%.  Year-to-date, XLV has been the third weakest sector of the S&P 500, only rising by 5.9% versus 16.7% for SPY. 

Chart 3

Energy: XLE

Economically sensitive Energy is the SEAF Model’s second-worst-ranked sector this week with a Ranking score of 27, and has been one of the SEAF Model’s 3 weakest sectors for 8 of the past 9 weeks (89% of the time) beginning May 13th.  The colored highlights in the upper panel of Chart 4 below show that Energy moved out of a Favored ranking (to a Neutral ranking) on May 3rd, and then moved further to an Avoid ranking on Jun 5th and, with the exception of just a couple of days around June 25th, has remained there since.  The lower panel shows that XLE has coincidentally underperformed the S&P 500 (SPY) by 10% as investor assets have continued to leave the sector.

Chart 4

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.