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Financials (XLF), Consumer Discretionary (XLY) Maintain Top SEAF Model Scores
Conclusion, Investment Implications, Strategy

Now that the presidential election is behind us, it appears that the sector rotation is becoming a bit more sticky as Consumer Discretionary (XLY) has maintained a top-three SEAF Model ranking since Oct 28th and Financials (XLF) has been in the top three rankings since Nov 4th.  Communication Services also made its way back into the SEAF Model’s top three rankings for the first time since Oct 7th.  At the other end of the spectrum, defensive Health Care (XLV) and Utilities (XLU) are the two worst-ranked sectors according to SEAF with ranking scores of 33 and 29, respectively.

11-16-2024 Editor’s Note:  For most of this year, relative performance trends in the sector space have been very small, short-lived,  and erratic.  We believe this has been primarily due to two things.  First, all of this year’s commotion surrounding inflationary pressures , the market debate over Fed-engineered hard or soft landings for the economy, and all the extreme volatility in market expectations that this has caused as can be seen in Federal Fund Futures.  The second was the Presidential Election and the wide disparity in policies and economic direction that they implied.  The market hates uncertainty. 

Now that some if not most of these issues have become at least a little more clear, it appears that sector asset flows may be calming down a bit.  Over the past few weeks the asset flows have been a bit more sticky as Consumer Discretionary (XLY) has maintained its current top three SEAF Model Ranking since Oct 28th, and Financials (XLF) has maintained its top three ranking since Nov 4th.

Meanwhile, the SEAF Model is slowing catching up to the S&P 500 (SPY), now trailing the benchmark index by just 1.9% year-to-date (YTD) but with a 33% lower maximum drawdown and also a lower standard deviation and beta.  In addition, the SEAF Model is also leading its peers, ETFs that engage in sector rotation including SECT, SSUS, MSMR, and TACK, on a YTD basis.  Bigger picture, since inception in mid 2018, The SEAF  Model is outperforming the S&P 500 by 8.2% on an annualized basis with a 13% lower maximum drawdown and a slightly lower standard deviation and beta.

Beyond The SEAF Model Video: This Week’s Sector Themes

This weekly video by Jack 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 Financials and Consumer Discretionary in All time periods.
  • Money starting to move into Communication Services in All time periods.
  • Money aggressively moving out of Health Care in All time periods.
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 Consumer Discretionary and Financials.  This is where the money is currently going in the sector space.

The latest data indicate a multi-timeframe trend of asset outflows out of Health Care and Utilities.  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).

Financials: XLF

Cyclical Financials (XLF) is again the SEAF Model’s top-ranked sector this week with a Ranking score of 3, which is the highest ranking possible.  The green highlights in the upper panel of Chart 1 below show that Financials moved into Favored status according to SEAF on Oct 14th, while the lower panel shows that XLF has coincidentally outperformed the S&P 500 (SPY) by 7%.  As long as Financials maintains its Favored ranking according to SEAF, the more relative outperformance by XLF we are likely to see.

Chart 1

Consumer Discretionary: XLY

Cyclical Consumer Discretionary (XLY) is the SEAF Model’s second-best-ranked sector this week with a Ranking score of 6, up slightly from a #3 ranking a week earlier.  The green highlights in Chart 2 below show that Consumer Discretionary initially spiked up into Favored status on Oct 24th while the lower panel shows that XLY has coincidentally outperformed the S&P 500 (SPY) by 9%.  This is the highest/best SEAF Ranking for Consumer Discretionary since March.

Chart 2

Health Care: XLV

Defensive Health Care (XLV) is the SEAF Model’s worst-ranked sector this week with a Ranking score of 33, which is the worst SEAF Ranking possible.  The red highlights in Chart 3 below show that Health Care initially dropped into Avoid status on Oct 2nd (upper panel)  while XLV has coincidentally underperformed the S&P 500 (SPY) by 10%.  As long as Health Care remains on a SEAF Model Avoid status, XLV is likely to continue underperforming the US broad market.

Chart 3