Roughly four months after the Christmas swoon in US stocks, sector rotation suggests the bull market is alive and well.
For the uninitiated, sector rotation is the subset of technical analysis that involves evaluating what types of stocks are performing well to help predict how the stock market as a whole will perform moving forward. Historically, economically-sensitive sectors technology, industrials, and consumer discretionary stocks tend to outperform the stock market in a healthy uptrend, while economically-insensitive sectors like utilities and health care stocks typically outperform when the market is at risk of a pullback. Sam Stovall at CFRA developed the idealized sector rotation model shown below:
Source: Stockcharts.com. Note this chart does not include the relatively recent additions of the real estate and communication services sectors.
Of course, the real world is always much messier than the textbook, but so far this year, we’ve seen strength in the sort of pro-cyclical sectors that suggest the current uptrend remains within a healthy bull market:
Source: Stockcharts.com, FOREX.com
Mirroring Stovall’s model, the “offensive” technology, industrial and discretionary stocks are the strongest performers while “defensive” health care, utility and consumer staple stocks are underperforming.
Of course, some of these moves are being driven by idiosyncratic factors, rather than general risk appetite. For example, health care’s underperformance is partially driven by uncertainty over policy and the potential for a shift to “Medicare for all,” whereas technology has been boosted by an absurd rally in AAPL off the lows, with the world’s largest publicly traded company tacking on nearly $300B in market cap this year.
Regardless, a survey of the current sector landscape shows no signs of concern for bulls as of yet!