Technology Retains Its Top-Three Ranking, Financials Attracting Investor Assets 
Conclusion, Investment Implications, Strategy

This week, the SEAF Model retains its overweight bias in economically sensitive Technology (XLK, since May 20th) and Financials (XLF, since July 8th) and adds defensive Utilities (XLU), the latter which has been jumping in and out of a top-three SEAF Ranking since May 6th.  Year-to-date, only XLK and Communication Services (XLC) have outperformed the S&P 500 (SPY), and only by 3.7% and 1.1%, which has made profitable sector rotation difficult thus far this year as investor assets continue to jump quickly from sector to sector.  This “jumpiness” indicates investor uncertainty as the market contemplates the future direction of interest rates, the results and implications of the upcoming presidential election, and just 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 38% since October 2023.  Anecdotally, however, 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 much 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), NYSE Technology (NYSE), Semiconductors (XSD), and Gold Miners (RING).  We are also closely watching insurance and banking stocks for potential emerging long/overweight opportunities.

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 move into Financials in all time frames.
  • Money churning in and out of Technology in the Trading time frame.
  • Money aggressively leaving Energy in all 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 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).

Financials: XLF 

Cyclical Financials (XLF) is the SEAF Model’s best-ranked sector this week with a Ranking score of 9.  The upper panel of Chart 2 below shows that Financials moved into Favored Status according to SEAF on Jly 3rd, while the lower boundary shows that XLF has been stabilizing versus the S&P 500 (SPY) since Jun 14th after aggressively underperforming since April.  The longer Financials retains its Favored ranking, the more likely that XLF’s recently improving asset flows are likely to result in relative outperformance versus SPY.

Chart 1

Technology: XLK

Economically sensitive Technology is the SEAF Model’s third-ranked sector this week with a Ranking score of 13.  Also note that, although Technology remains very highly ranked in the Tactical and Strategic timeframes, it has recently been vacillating wildly in the Trading time frame, with investor assets charging into XLK one week and charging back out the next.  This erratic behavior underscores investor nervousness about just how much higher the current US broad market advance can continue after the S&P 500 has already risen by 38% since the October 2023 lows, as well as uncertainty about the direction of interest rates and the upcoming Presidential election.

Chart 2

Energy: XLE

Economically sensitive Energy is the SEAF Model’s worst-ranked sector this week with a Ranking score of 31, and has been one of the SEAF Model’s 3 weakest sectors for 9 of the past 10 weeks (90% 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 24th, 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 3

Industrials: XLI

Economically sensitive Industrials is the SEAF Model’s second-worst-ranked sector this week with a Ranking score of 28.  The colored highlights in the upper panel of Chart 4 below show that Industrials moved out of a Favored ranking (to a Neutral ranking) on Jun 4th and then moved further to an Avoid ranking on Jun 27th and has remained there since.  The lower panel shows that XLI has coincidentally underperformed the S&P 500 (SPY) by 5% as investor assets have continued to leave the sector.  As long as Industrials retains its current Avoid ranking according to SEAF, recent relative underperformance by XLI versus SPY is likely to continue.

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.