The Sector Rotation Landscape in Perspective

02/12/2014 6:00 am EST

Focus: STRATEGIES

Corey Rosenbloom

Founder and President, Afraid to Trade

When selecting stocks to trade, it’s helpful to view the market from a sector perspective and choose strong stocks in strong sectors and avoid weak stocks in weak sectors, says technician Corey Rosenbloom of AfraidToTrade.com.

With the market tumbling at the start of 2014 and then recently retracing higher suddenly, let’s take a look at the sector rotation landscape and put the sell-off and retracement phase into context.

Here’s the broader Nine-Chart Sector SPDR ETF Grid:

chart
Click to Enlarge

For now, we can see the similarities in the six “risk-on offensive” sectors (top of the grid) and spot the differences in the “risk-off defensive” sectors (bottom three).

With slight variation between the sectors, the risk-on sectors had a sharp but similar sell-off phase followed by a stable half-way or roughly 50% retracement (up) against the early 2014 sell-off.

The exception—which draws our attention—are the Healthcare (XLV) and Utilities (XLU) sectors, both of which “fell less than” the risk-on sectors (and consumer staples) and then continued moving higher during the current market retracement.

In fact, Utilities emerged the relative strength leader not just in the pullback (“What pullback?” you ask—price never broke under the 20-day SMA unlike all other sectors) but also the upward retracement phase.

To underscore the point, Utilities are close to new highs into the $39.00 per share level. Note no other sector—except Healthcare—is as close to its recent 2014 swing high.

By the same token, Energy (XLE) is the visual relative strength laggard so far, as it experienced a sharp sell-off like other sectors but its “recovery bounce” has been visually weaker.

The same can be said about consumer staples (XLP), which also trades under its half-way point of the swing high to low.

When selecting stocks to trade, it’s helpful to view the market from a sector perspective and choose strong stocks in strong sectors and avoid weak stocks in weak sectors (for buying purposes).

By Corey Rosenbloom, CMT, Trader and Blogger, AfraidToTrade.com

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