Sector Rotation of Interest

I am not great at day trading, but I have been successful at watching sectors (rotation) and picking up on good ideas as they develop. We have spent the last 25 plus years tracking and trading sectors based on rotation of money as it moves. One of the key parts of this process is having a Watch List of sectors and defining what is moving and the why factor if possible. If we can understand the why, the how, taking advantage of the move to make money, will present itself in time. Below are three sectors on the move currently and some potential opportunities that may result from the move. We are still in the tracking phase of the process with each, and if they follow through on the opportunities we will post them to the Watch List in the appropriate Model on the website.

Housing – The sector has been positive until May when we saw XHB, SPDR S&P Homebuilders ETF stall and start the current downtrend. As you can see on the chart below the acceleration and test of the 200 DMA in June as the broad index hit it’s recent low before the bounce or current uptrend. The housing sector bounced, but it has continued to trade with a series of lower highs and support near the $28.90 level. XHB is back at this level of support again and looking more inclined to move lower breaking support. The analyst continue bang the drum for the upside in this sector, but the chart is not showing much faith from investors.

XHB

The challenges facing the homebuilders is different than that of the housing sector as a whole. Labor costs, material costs, land costs, and financing costs are all rising. They are eating into profits for the builders and that is putting some downside pressure on the stocks. Looking forward that is not likely to change near term and that could open the opportunity on the downside as an investment. A break below the 200 DMA could be an entry point for short play in the sector. Ryland Group (RYL) broke below key support at the $36.50 level on Wednesday and is adding to the downside pressure. I am keeping this on my Sector Watch List to see how it plays out short term.

Small & Mid Cap Sectors – There are some signs of money rotation beginning to exit these sectors. I am watching this currently as they provided some key leadership on the bounce off the June lows. IWM, iShares Russell 2000 Index ETF is showing a head and shoulder pattern at the current highs. A break below $103 would be negative for the current uptrend and validate the exodus of money from the sector. IJH, iShares Midcap 400 index ETF shows a similar pattern with more volatility.

If money is rotating from these sectors where is it going? If it is leaving stocks completely that is an additional negative for the broad indexes overall. However, if it is finding other sectors of value the broad index trend will only strengthen. On Tuesday we did see the technology sector (XLK) gain (hit new high) with the semiconductor stocks (SOXX) moving higher to lead the sector. If the rotation is from small and mid cap to technology that is a positive and we would need to make the necessary adjustments to our allocations, but if money markets are growing in assets, we need to evaluate our exposure to equities overall. Again this is another rotation that is worth putting on our watch list for the outcome and opportunities.

IWM

Gold – the precious metal has made a move off the lows and back towards the $1340 resistance level with a cup and handle pattern to go with the move. A break above this resistance would be a positive as it would put the downtrend in jeopardy of being broken on the upside. Price has moved above the 10, 20 and 50 DMA and showing some positive momentum short term. This is not the first time the metal has tried to mount a move to the upside. This is worth our attention if the upside trend starts to gain momentum. GDX, Market Vectors Gold Miners ETF equally is break through some key resistance short term. Both the metal and the miners are worth putting on our watch list of sector rotation.

GDX

There is always something on the move when you track all the sectors that make up the broad market asset classes. The goal is to find what is moving, define the rationale behind the move, validate the opportunity of the move, assign a time frame to the opportunity and define a strategy to capture the opportunity. We will update these as they warrant going forward as well as others that arise.