Money Rotates Into Late Cycle Names
We are late in this bull market.
Posted by JC Paretson April 18th, 2014
The recent rotation we’ve seen into some of the more traditional late cycle sectors is something we probably shouldn’t ignore. This is a topic that I’ve brought up a few times this week as Energy broke out to new all-time highs and is also showing strength against the early cycle sectors.
My friend and excellent market technician JC O’hara from FBN Securities sent over a note on Thursday where dives deep into the consequences of this rotation. He prefers that I refer to him as, “The Real JC”, so we’ll throw him a bone in order to stay on his distribution list!
The Real JC’s first chart shows the performance of each sector for the 90 days prior to the April high in S&P500. Look at the leadership. Money is flowing heavily into Utilities and Energy more recently. The weakness out of the early cycle sectors like Discretionaries, Financials and Tech is something we have to take note of:
“The recent sector performance has been troublesome. It is not an encouraging sign to see the market being led by utilities. Even more concerning is the lack of performance in Discretionary, Industrials and Financials. The last 90 days we have seen just that. Examining prior market peaks (too early to confirm we are currently at one), we note that Discretionary weakness combined with Utility outperformance was a forewarning of market weakness to come. Smart money hides in Utilities, Staples, Health Care and Energy, while Financials, Discretionary and Technology get hit the hardest. While there has certainly been active sector rotation from 2013, the market has not turned lower yet. If the recent sector performance is a canary in the coal mine, we expect to see shallow bounces where traders lighten up on their riskier assets, and continue to rotate money into the historical sectors that held up the best.”
The next chart show’s the sector performance for the 90 days prior and 90 days after the 2007 stock market peak. Look how well the defensive sectors held up after the top. Also notice the relative weakness in Discretionary and Financials ahead of that market top (click chart to embiggen):
Here is the same chart, but for the market peak in 2000. Discretionary once again hinted at market weakness while the strength in Utilities forewarned of upcoming weakness for the major averages (click chart to embiggen):
JC O’Hara sent this over to me at what I think is the perfect time to point out this rotation. This seems all too similar to prior market peaks. We’re going to want to see Financials, Tech and Discretionaries start to turn back up on a relative basis in order to take this scenario out of the equation. But the consistent underpermance out of these sectors and money flow into Utilities and Energy can’t be ignored. The market is speaking. Are you listening?
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Utilities and Stocks Breaking to New 52 Week Highs
Apr 16, 2014: 6:05 PM CST
Sometimes the simplest things are effective for finding candidates to trade on a short-term or intraday basis.
For example, if you want to identify strong stocks that are likely uptrending – and may continue to do so – scan for stocks bursting to new 52-week highs in an uptrending market (particularly in strong sectors).
Let’s take a look at the current list of candidates of the 41 stocks that registered new 52-week highs in today’s bullish session.
The 41 stocks above (of the 500 stocks in the S&P 500 list) carved out new 52-week highs today.
You can put them in a scan list and quickly study their charts for steady uptrends and potential trading (retracement) candidates.
Do additional analysis on the stocks that show the most potential according to your trading style.
I separated the Utilities ($XLU) stocks with yellow highlights to note that 16 of the 41 stocks are “Risk-off” or “Defensive” stocks in the Utilities sector.
Here’s a chart of the broader XLU Utilities ETF (note the uptrend and dominant price action into the highs):
That’s generally not something you want to see if you expect the broader market to continue power-trending higher.
http://blog.afraidtotrade.com/utilities-and-stocks-breaking-to-new-52-week-highs/ |
