Sector Rotation Is On
Take a look at the nearby chart. It compares the percentage gains for each major sector since the March low. There’s nothing really surprising about it - financials led the way, while utilities and telecom were dragging the bottom. I think we all knew in the back of our heads what the basic numbers were, but a visualization such as this one really adds some perspective.
I know what you’re thinking…… “Great, but what do I do with this information now?”
There are two diametrically opposite interpretations of this information. One is that the trends in place will remain in place… the leaders will remain the leaders. The other interpretation is that change is inherent… what the market hated yesterday it’ll love tomorrow. The fancy term is ’sector rotation’.
I think both interpretations have their merit, though I’ll confess I’m more of a rotation guy than a pure trend-follower. I reconcile the two, however, by adding other layers of analysis (technical, fundamental, and common sense).
For instance, while I still firmly believe the financial sector has the most room to recover, I also know double-digit disparities between the best and worst sectors just don’t last forever. So, I’m not really interested in adding new financial stocks to any portfolio right now; I’ll wait for some of the gap to be closed.
I also like the visual aspect of this chart as it lets me spot emerging momentum…. like the kind we’ve seen from energy stocks and cyclical stocks over the last month or so. You can’t see it at first glance, but a closer inspection of the chart (which is admittedly easier with my bigger version) indicates those two sectors are starting to perform much better than the rest. Perhaps we should adopt a corresponding bias for those two sectors.
You may see something else in the image - I hope you do. No matter what you do with it though, there’s a ton of great information in that tiny chart.
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