My first post on Sector Rotation was a huge hit with my readers last year, so I thought I would do another one to see where we are in the economic cycle. As I said before, the concept of sector rotation has been around for many years, and although some academic economists dismiss its value, history clearly supports sector rotations validity. While today’s economic conditions have been forever altered by the implosion of the US financial system, we can still see clearly rotation trends in action.
Where We are in the Current Economic Cycle
Below is the sector rotation model I use to determine our current condition:
The easiest way I know of to rank sectors is using ClearStation’s Relative Strength Rating. According to ClearStation, the RS Rating is defined as:
This is a Percentile that compares the price changes of a stock with all stocks trading on exchanges and ranges from 1 to 99, with 99 = Best. ClearStation uses 13-week price percentage changes to rank exchange-traded stocks and rate a stock based on the percentage of stocks it over performs. For example, a 78 rating means that the stock’s last 13-week price change is higher than 78% of stocks.
I then look at their sector listing tool and sort it by RS Rank. Below is an image of the sector ranking taken today:
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As you can see, the consumer cyclical and technology sectors are currently leading the way in the market. So let’s take a look at the rotation model with those areas highlighted:
Click To Enlarge
Taking a look the sector rotation model, we are currently somewhere between full recession and early recovery in terms of the economic cycle. Accordingly, the stock market should have put in a bottom, and we should be in the early phases of a bull market run.
If this is the case, then perhaps the Santa Claus rally will push the S&P 500 over the 1121 level, or, at the very least, a typically strong January bull run will occur. Keep your eyes pealed!
To Profitable Trades, Happy Holidays, and Merry Christmas,
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