"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
-
Sun Tzu

Sunday, July 17, 2011

Sector Rotation: Defensive Sectors Loosing Strength

Corey Rosenbloom recently wrote in latest post "What is the Sector Rotation Model Saying in July 2011" that "the model continues to to show defensive/protective money flows, which casts a cautious tone over the broad state of the stock market."

I do not agree with him. Here is why:


when you just look at relative sector performance by analyzing bar charts, you  will indeed come to the same conclusion. However, when we plot the sectors on a line charts, things start to look different. Indeed, defensive sectors have been outperforming since March, but relative strength has deteriorated in recent weeks (the chart shows relative strength against the S&P 500):


On the other side, some offensive sectors, Energy, Materials and Technology, obviously strengthened in June:



Industrials and Financials (not plotted) are still weak. I wouldn't be concerned of the latter ones because banks didn't really outperform throughout the entire rally anyways and the market has demonstrated that he doesn't need participation of the Financials.

Bottom line: yes, there was some rotation into defensive sectors since the beginning of the year. But a rotation back into offensive stocks might have started. Corey actually recognized recent offensive strength in his post, but I think the line chart gives a better impression of what is going on.