Rotation With a Rising Tide Shows Strength: Sector Review 10-31-11

• Posted by Greg Harmon
• on October 31st, 2011

The past week did a lot to reveal the strength of the current market. But you need to look at it from the proper perspective to see it. Two themes help to make my point. First, a rising tide lifts all boats. In a strong market all sectors will rise. The second is the concept of sector rotation. As a market moves through phases there is rotation from defensive sectors that have been leading the market at the recent bottom into the riskier sectors that had been hit the hardest. Let’s take a look.

Former Leaders

Three sectors that had been among the best performers had the worst week. The Utilities Select Sector SPDR, $XLU, shown below, along with the Consumer Staples Select Sector SPDR, $XLP and Consumer Discretionary Select Sector SPDR, $XLY all rose less than 1% for the week. They all still look very strong with rising Relative Strength Indexes (RSI) and positive and increasing Moving Average Convergence Divergence (MACD) indicators to go along with all

Utilities Select Sector SPDR, $XLU

being over their rising Simple Moving Averages (SMA). But the doji candles for the week suggest indecision going forward or a pause to reassess. The tide rose and took them higher, but they are no longer leading.

Solid Performers

Two other sectors the Technology Select Sector SPDR, $XLK and Health Care Select Sector SPDR, $XLV, continued to be solid performers last week each moving about 3.5% higher. The $XLV, shown below, moved higher with the MACD crossing positive and the RSI nearing the 60 level. They are solidly above the SMA’s now and heading to the top of the Bollinger band range

Health Care Select Sector SPDR, $XLV

and the highs of the year. But this is where the proper perspective comes in. Using these solid performers as the benchmark for performance for the week the former leaders above under performed by over 2%. This group should be used to measure the effect of the rising tide. With that in mind look at the remaining sectors.

Rotation Winners

The big winners then against that benchmark, the Materials Select Sector SPDR, $XLB, below, Energy Select Sector SPDR, $XLE, Financials Select Sector SPDR, $XLF and Industrials Select Sector SPDR, $XLI, all outperformed the rising tide by 2-4%. in fact the sectors that had been hit the worst had the best week. They all have RSI’s that are moving through the mid line towards bullish territory and MACD’s that are crossing positive. Clear rotation into these sectors.

Materials Select Sector SPDR, $XLB

Putting the whole picture together then, shows the rising tide lifting the solid performing sectors and the rest of the market about 3.5% along with a corresponding sector rotation out of the defensive sectors that had been the leaders and into the badly beaten down sectors. Rotation with a rising tide. Broad strength.

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