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Technology Collapses To The Second-Weakest Sector, From A Top-Ranked Sector In October
Conclusion, Investment Implications, Strategy

Once again, two of the SEAF Model’s three top-ranked sectors are new this week — Financials (XLF) and Industrials (XLI) – while Consumer Discretionary (XLY) has retained its recent position as a top-three-ranked sector.  Repeating from last week’s report: The recent frantic rotation within the top four to five sectors according to SEAF is historically very atypical based on our data since 2018.  We believe this anomaly in the data indicates investor indecision/caution due to the significantly different economic outcomes that many top economists have predicted depending on who wins the presidential election. 

At the other end of the spectrum, we note that Technology (XLK) was the worst-ranked sector in the Trading (weekly) category and the third-worst-ranked sector in the Strategic (monthly) category last week after having the second-best composite score a week earlier and the top-ranked composite score three weeks ago. 

11-2-2024 Editor’s Note:  For most of this year, relative performance trends in the sector space have been very small, short-lived,  and erratic.  This week, for example, two of the top three SEAF Model scores are sectors that were not in the top three a week ago.  This indicates, even though the S&P 500 (SPX) is just 2.4% off its October 17th all-time high, that there is a lot of angst and market indecision underneath the surface of the market.  This is likely due to the upcoming election, and could also be affected by concerns about recently fluctuating interest rates.  No one knows for sure, and it doesn’t really matter why.  All that matters is that it’s here, it’s real, and it has been affecting market behavior this year.

Year-to-date (YTD), the three best performing Sector SPDR ETFs have been, in order, Communication Services (XLC), Financials (XLF), and Utilities (XLU).  Also year-to-date, the SEAF Model’s three most profitable overweight signals have been those very same three sectors.  This indicates the model is working precisely as it should in identifying which sectors to buy.  The issue has been that this year’s three best-performing sector ETFs have only outperformed SPY by relatively small amounts, while frequently (sometimes weekly) changing the order of which ones are outperforming the most.  They keep rotating, which indicates indecision.  Meanwhile, every other sector has underperformed the S&P 500.  So — at least so far this year — there has been very little relative outperformance for SEAF to capture, and whatever outperformance there has been has not been “sticky”.  But the reason we consistently follow a model like this is to be in the game when those larger and more lucrative relative outperformance trends emerge.

Year-to-date, the SEAF Model is currently trailing the S&P 500 by about 5%, but this has also been changing week to week as SEAF was outperforming SPY by 2% in September.  Meanwhile, however, SEAF has maintained a 3% lower maximum drawdown, a 2% lower standard deviation, and a 50% lower beta than the S&P 500.  In other words, even in a year that has not seen any significant and sustained sector relative outperformance trends, SEAF is still less risky than the market.  Moreover, SEAF has been outperforming its peers — ETFs that do some form of sector rotation — for most of this year and has outperformed them on an annualized basis since 2020.  And, from June 2018 through the end of last week, the SEAF Model’s annualized total return has been 8% better than the S&P 500 with a 5% smaller maximum drawdown.

So, don’t get distracted by the near term noise as the money hops from sector to sector, trying to catch the next “sticky” outperformance trend, but rather focus on the big picture.  The power and the advantage of data-drive investing is not getting knocked off of your long term game by short term conditions.

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

This weekly video by Jack and John 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 in the Trading and Tactical time periods.
  • Money continues to move into Consumer Discretionary in All 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 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 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.  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 the SEAF Model’s top-ranked sector this week with a Ranking score of 6.  Table 1 above shows that, through the end of last week, Financials has been the second strongest sector on a Trading (weekly) basis and is the strongest sector on a Tactical (monthly) basis.  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 1%.  Previously, the green rectangle shows that the sustained Favored status by Financials between July and early September coincided with 8% of relative outperformance by XLF versus SPY.

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 12.  Chart 2 below shows that Consumer Discretionary spiked up into Favored status on Oct 24th, so it’s too soon to determine whether this is just a brief move into and then quickly out of Favored status like it was in late September and early July, or a more sustained favored ranking as occurred between October and December of 2023 when XLY coincidentally outperformed the S&P 500 (SPY) by 6%.

Chart 2

Industrials: XLI

Economically sensitive Industrials (XLI) is the SEAF Model’s third-ranked sector this week with a Ranking score of 13.  Chart 3 below shows that XLI spiked into Favored status at the end of last week but has been oscillating back and forth from Favored to Avoid and back again since July.  A sustained stay in Favored status, like there was between March and mid-May as shown by the green rectangle, would be necessary to indicate there is enough sustained bullish conviction to facilitate another trend of relative sector outperformance.

Chart 3