Broker Check
Numbers Game - Sector Rotation

Numbers Game - Sector Rotation

| September 30, 2019

TLDR: Technology and Discretionary are starting to pull back to a more normal trajectory. Utilities and Real Estate were safe havens in the December pullback and continue to show strength.

Sector Rotation

Today we are going to look at a tool designed to measure relative sector strength.  This tool shows the average relative performance of a sector to every other sector measured.  It helps us identify what sectors have been performing the best historically and how they have performed compared to other sectors. We can use this information combined with fundamental and technical analysis to try and understand why a sector would be performing better.

4 years of the SPX index

We can see that the SPX has had some good growth as well as some significant Volatility in the past 4 years.  The yellow line is the Presidential election.  I have added it as a major landmark for our consideration.  The color of the bars are signaling significant price drops.  The color will help us visually identify volatile market conditions.

Relative Sector Performance

Next we will look at relative sector performance.  This may appear complicated but take a second to scan over it.  These two pictures below have indexes that measure the relative percentage performance of each sector.  Each sector is labeled in blue and If the index has a green dot then it is outperforming the other sectors on average.  It is also labeled with a green, "Strong Price Action" if it is outperforming.  I have included Government Bonds as well for comparison even though it is not a stock sector.

The Same 4 years as above


  • Technology
  • Financials
  • Government Bonds
  • Healthcare
  • Discretionary Spending
  • Industrial
  • Utilities
  • Staples
  • Energy
  • Materials
  • Real estate

Don't worry if this is a little complicated to read and understand.  We will remove big chunks of speculation and view it only through the lens of ,"What has the price done?"

Sector Breakdown

Technology stocks have been hot for the last few years....Really hot...  Many advisors and individual investors alike have increased their exposure to the sector.  That luster is starting to fade now.  So if your portfolio is still out sized long on technology it may be a good time to talk to your advisor and re-balance to bring your exposure in line with your risk tolerance.

Financials had a nice bump right at the election.  That has mostly faded back to a more normal performance.

Bonds did not buffer big losses on the first market pull back in January 2019 but recently they have rallied significantly.  With the fed now cutting rates again, bonds have also had a nice wind at their back as rates drop.  Those who kept a diversified portfolio ended up benefiting from this offset in the past year.

Healthcare buffered losses well in the big December correction but have been pretty normal since then.

Discretionary much like technology has been on a tear for the last 4 years. This sector contains well known and well run companies like Amazon, Starbucks and McDonalds just to name a few.  Having been fueled by the US consumer for the last 48 months, this sector has had a strong run.  Only now are we seeing signs of a pull back.  Again depending on your risk tolerance, the opportunistic investor with considerable exposure to the Discretionary sector might look to re-balance here.   

Industrials had a nice pop at the election like Financials did.  This has faded back to a more mundane trajectory.

Utilities have been at the heart of portfolio defense leading up to and after the big December pullback.  These names continue to perform very well.  Stability is back in fashion as these names continue their march higher.

Staples has a similar story to Utilities.  This sector was viewed by the market as a place to hide from the volatility.  That favor continues. 

Energy was hit hard in the December pull back.  The combination of slowing global growth and trade war tensions has weighed on this sector.  Any breaking news of a trade deal could create a large rebound here. The risk of a global slowdown continuing is the flip side of the coin and could lead to further weakness.

Materials had a nice pop at the election just like Financials and Industrials. That momentum has also faded to a more normal trajectory.

Real estate along with Staples and Utilities have shown significant resilience in the recent volatility. It continues to show strength.

The Big Takeaway

Tech and Discretionary continue to show strength although the luster is showing signs of age.  The new kids on the block are Utilities Staples and Real Estate.  They showed a significant resilience in the big December pullback and that has led to continued gains in the area.  The question to ask yourself now is will these patterns continue to favor defensive value stocks or is growth about to make another big run? 

The opinions in this blog are expressly those of the author and are for informational purposes only.  The author does not own securities of any of the companies mentioned above.  At no point are any of the opinions expressed a recommendation to buy or sell any security.  Investing in securities contains risk with potential loss of principal. Before buying or selling any security please consult your own Financial Professional.