Aug

18

Time for Rotation?

Pete @ 3:55 PM | | Start a Discussion 

There was some interesting sentiment news today from NASDAQ. They announced the creation of NASDAQ OMX indexes, four new benchmark indexes that will “help international investors better manage their exposure to these increasingly important global sectors”.

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YTD Comparison of $SPX, BBH, KOL, SLX, GDX

Is the timing of the launch somewhat late? Three of the benchmarks are commodity-related and the biotech benchmark has been on momentum player’s watch.

Consumer Staples and Healthcare

While reviewing the weekend reading, another sentiment-related article caught my attention by none other John Murphy:

Two Sector Leaders Are Staples and Healthcare
Until proven otherwise, the two strongest market sectors are still consumer staples and healthcare. And both are defensive categories. Chart 1 shows the Consumer Staples Select (SPDR) trading at a new eight month high after breaking through its spring high. It’s nearing a test of its record high formed last December. Its relative strength ratio (below chart) has been rising since last summer when the market started to peak. Chart 2 shows the Health Care SPDR (XLV) bottoming at the end of June. The XLV has exceeded its spring high and its 200-day moving average. Its relative strength line turned up during May when the last market rally ended. The simplest way to play the two sectors is through these ETFs. If you’re a stock picker, there are lots to choose from.

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Consumer Staples Select Sector SPDR(XLP)

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Health Care SPDR (XLV)

These two plays have been going on for so long that we must wonder out loud and ask how many bulls are left to run into these two areas.

Smallcap Stocks

Last, but not least, are small cap stocks. They have received a lot of attention lately:

Why Are Small Fish Still Biting?
Small-company U.S. stocks are leaving their bigger brethren in the dust. Investors chasing those outsized returns could wind up choking, too. Since July 15, the Russell 2000 small-cap index is up 13.7%. Those stocks have an average market capitalization of $1.1 billion. In comparison, the Standard & Poor’s 500-stock index has climbed 6.9%.

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iShares Russell 2000 Index (IWM)

Since the July lows, there has been a ‘flight to risk’ towards small caps. The bulls are watching the June swing highs. With SPY has not even coming close to testing its June highs, this divergence is well worth watching.

Today’s list of stories is important to watch, especially now that major rotation may be underway. Where will the money be flowing into and out from? Keep the following in mind:

  • As Mullainathan & Thaler wrote in their classic paper, “…it may often pay ’smart money’ to follow ‘dumb money’ rather than to lean against it.”
  • The Investor Sentiment Cycle-Market Phases can’t never change thanks to human nature.

Charts shown in today’s post have our swing trading tools applied.

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