November 9, 2009

Sector Rotation in the S&P 500 Index

Oct 09 ended a seven-month run of monthly gains in the S&P 500 - has the market turned defensive?

The 60-minute charts above plot the nine Select Sector SPDRs (colored line charts) against the S&P SPDR (black bars). The percentage change, calculated from the Sep 09 close, in both the individual sectors and that of the S&P 500 are denoted in the right column of each chart. A Fibonacci retracement grid is plotted from swing low to swing high on the Energy sector ETF.

From left to right, top to bottom, the ETFs plotted are:

Left Column

• Discretionary
• Technology
• Industrials

Center Column

• Materials
• Energy
• Staples

Right Column

• Health Care
• Utilities
• Financials

While last week's price action did result in recovering the S&P 500 close of Sep 09, what's apparent is that monies do appear to have moved into the Energy sector. At its apex, the Energy sector had posted more than a 12% gain from its Sep 09 close. During the sell off into the close of Oct 09, Energy had retraced approximately 62% from that percentage change swing high. Since that bottom, the Energy sector has advanced again to post approximately a 6% gain since the Sep 09 swing low.

Certainly the Energy sector has demonstrated the greatest volatility relative to the overall market, but notice that the Staples sector essentially moved sideways forming a base into the close of Oct 09. This apparent move into a renowned defensive sector suggests managers are looking to reposition their portfolios after the consider gains of the past several months. What's lacking now is follow through into the Health Care and Utility sectors.

There are numerous considerations when looking at the state of today's overall market. Economic news is not improving, yet the market continues to advance. A key tenet of the Sector Rotation model is that Energy leads at market tops, so the charts above bear closer observation. With the Energy sector now holding below previous short-term support at the 38% level of the aforementioned retracement, any breakout above the 6% advance should be heeded as a warning sign.

As has been mentioned in the past few weeks, markets can remain overbought for some time. Several technical indicators continue to signal concern regarding the multi-month advance of equities markets, not the least of which is the now faltering relative performance of the Financial sector. So long as the Energy sector continues to outperform the overall market, technicians should continue to monitor the market for continued movement into defensive sectors as trading continues to unfold.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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