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SEAF Makes A Quick One-Week Shift Into A Defensive Alignment
Conclusion, Investment Implications, Strategy

The SEAF Model made an atypical all-at-once wholesale shift into a defensive alignment at the end of last week as Utilities (XLU), Health Care (XLV), and Consumer Staples (XLP) are now the top-three ranked sectors.  This indicates that managers are defensively adjusting portfolios despite the S&P 500 trading at all-time highs.  Asset flows, which fuel price trends, often precede changes in market direction.  At the other end of the spectrum, offensive, “risk on” Technology (XLK) collapsed to the worst- and second-worst-ranked sector in the Trading and Tactical time periods.

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 provides more detail on where sector-related assets are going, and where they are leaving, in the 11 Sector SPDR ETFs.  Jack also displays and discusses our SEAF “Rainbow Charts” highlighting SEAF’s past 12 months of Favored, Neutral, or Avoid rankings. 

From The Video: This Week’s Major Themes
  • Money aggressively moving into Utilities in All time periods.
  • Money aggressively moving into Health Care and Consumer Staples in the Trading and Tactical time periods.
  • Money aggressively moving out of  Technology in the Trading and Tactical 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 where the money is going and to avoid the sectors where the money is coming out.  

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

The latest data indicate a multi-timeframe trend of asset inflows into Health Care.  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 the Energy and Technology sectors.  This is where the money is coming from.

SEAF Heat Map

The SEAF Heat Map provides additional insight into the flows of the 11 Sector ETFs. Each time frame is independent, meaning the color spectrum for one period does not affect another. For example, the strongest inflow (dark green) for the trading week is separate from the strongest inflow for the tactical month.

The heat map visually represents the spectrum of inflows and outflows, with green indicating inflows and red indicating outflows. The more extreme the flow, the darker the corresponding color—deep green for strong inflows and deep red for strong outflows. Flows closer to yellow indicate minimal percentage change.

This tool serves as an additional layer of information to help investors not only identify where sector flows are moving but also gauge the relative strength of those flows compared to their peers.

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).

Utilities: XLU

Defensive Utilities (XLU) is the SEAF Model’s top-ranked sector this week with a Ranking score of 9.  Utilities has been one of the top three-ranked sectors for 4 of the past 5 weeks beginning on July 28th, and has been the top-ranked sector twice during this period.  The upper panel of Chart 1 below shows that XLU has been on a Favored status according to SEAF since July 9th, while the lower panel shows that XLU has outperformed the benchmark S&P 500 (SPY) by 1.0% during this period.  Year-to-date (YTD), according to sectorspdrs.com, XLU  is the third-best performing Sector SPDR ETF, rising by 13.7% while outperforming SPY by 3.7%. 

Chart 1

Health Care (XLV)

Defensive Health Care (XLV) is the SEAF Model’s second-ranked sector this week with a Ranking score of 13.  Health Care was also the top-ranked sector last week in both the Trading and Tactical time periods.  The green highlights in Chart 2 below show that Aug 21st is the first time that Health Care has moved into Favored status according to SEAF since Apr 30th, while the red highlights in the lower panel show that XLV underperformed the benchmark S&P 500 (SPY) by 17.0% between these two dates.  Year-to-date (YTD), according to sectorspdrs.com, XLV  is the worst-performing Sector SPDR ETF, rising by just 0.4% while underperforming SPY by 9.5%. 

Chart 2

Consumer Staples  (XLP)

Defensive Consumer Staples (XLP) is the SEAF Model’s third-ranked sector this week with a Ranking score of 14, which is just barely in Favored status.  The green highlights in Chart 3 below show that Aug 12th, the previous instance that Staples temporarily rose into Favored status, was the first time that Staples had been in Favored territory since Jun 4th, while the red highlights in the lower panel show that XLP underperformed the benchmark S&P 500 (SPY) by 9.0% between these two dates.  It would take a sustained period in Favored status for Staples to indicate there is enough bullish conviction to fuel a period of relative outperformance versus SPY.  Year-to-date, according to sectorspdrs.com, XLP  is the fifth-worst-performing Sector SPDR ETF, rising by 4.9% while underperforming the S&P 500 (SPY) by 5.0%.  

Chart 3