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Consumer Discretionary (XLY) Retains Its Late October Top SEAF Ranking
Conclusion, Investment Implications, Strategy

Consumer Discretionary (XLY) continues to maintain its October 28th top-three SEAF Model rankings while the model added Technology (XLK) and Communication Services (XLC) as new Favored sectors this week.  At the other end of the spectrum, defensive Health Care (XLV) and economically sensitive Energy (XKE) are the two worst-ranked sectors this week.

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.  Jack also displays and dissects our SEAF “Rainbow Charts” which display the past 12 months of Favored, Neutral, or Avoid rankings in these Sector SPDRs.

From The Video: This Week’s Major Themes
  • Money continues to aggressively move into Consumer Discretionary in All time periods.
  • Money slowly moving back into Communication Services in All time periods.
  • Money aggressively moving into Technology in the Trading and Strategic 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 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 out of Health Care and 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 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).

Consumer Discretionary: XLY

Cyclical Consumer Discretionary (XLY) is the SEAF Model’s best-ranked sector this week with a Ranking score of 6.  The upper panel of the chart below shows that this is the best (lowest number) SEAF Ranking for Consumer Discretionary since February.  The green highlights in Chart 1 below show that Consumer Discretionary initially moved into Favored status on Oct 24th while the lower panel shows that XLY has coincidentally outperformed the S&P 500 (SPY) by 8%.  

Chart 1

Technology: XLK

Economically sensitive Technology (XLK) is tied with Communication Services (XLC) this week as the SEAF Model’s second-best-ranked sector with a Ranking score of 9.  Chart 2 below shows that Technology has atypically been bouncing erratically back and forth between Avoid and Favored status since May (upper panel) while the relative performance between XLK and the benchmark S&P 500 (SPY, lower panel) has essentially gone nowhere, the latter because there has not been a sustained, consistent trend of asset flows.  This does not mean that we discourage investors from taking this signal within the context of the SEAF Model because we don’t know when these asset flows will return to more normal behavior, but rather as a cautionary sidenote to help manage expectations.

Chart 2

Communication Services: XLC

Economically sensitive Communication Services (XLC) is tied with Technology (XLK) this week as the SEAF Model’s second-best-ranked sector with a Ranking score of 9.  The upper panel of Chart 3 below shows Communication Services moved into Favored status on Nov 12th, while the lower panel shows that XLC has outperformed the S&P 500 (SPY) by 2% since then.  As long as Communication Services retains its Favored status according to SEAF, recent relative sector outperformance is likely to continue.

Chart 3