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How To Use The Sector Rotation Model: S&P Sector Analysis Report July 2022

How To Use The Sector Rotation Model: S&P Sector Analysis Report July 2022

2022-07-12

Where will fund managers put their billions to work? What forecasting methods and principles do they use? How well can they anticipate the outcome of the market?


How To Use The Sector Rotation Model

Money managers view the market through the lens of market cycles and economic cycles. The Sector Rotation Model is a theoretical model based on Sam Stovall’s S&P’s Guide to Sector Rotation and states that different sectors are stronger at different points in the economic cycle.


We are using this site to look at the sector rotation model: https://stockcharts.com/freecharts

The message from Q1 says this was a strong Energy market.


In Q2, there was strength in Consumer Staples and Health Care and Utilities, with Energy now unwinding.


Forecasters review the first 1-2 weeks of the quarter and decide where to put their money. Did they have their forecasts right this year? Let’s have a look.


1st week of Q1:


Very similar to the entire first quarter shown inside.


1st week of Q2:


Also very similar to the entire second quarter shown above.


Sector Rotation in Q3



Studying sector rotation is helpful in trading because knowing where the ‘Smart Money’ is moving helps you frame trades in the right markets at the right time.


The first week of Q3 is over, and we can begin to analyse and forecast for the quarter. However, holidays pockmark the first week of Q3. Mainly Canada Day on the 1st and US Independence Day on the 4th, meaning most of the market was likely on holiday.




1st week of Q3:



According to this first week, Tech, Communication Services and Discretionary are all outperforming. Meanwhile, Energy, Materials, Consumer Staples, Utilities, and Real estate are all left behind.

There may be an anomaly that isn’t adding up because this doesn’t quite make sense.

A Suspicious first-week Sector Rotation analysis

If this first week is correct, we jumped from Healthcare/Utilities/Cons. Staples, straight to Technology and Discretionary, by-passing real-estate and financials. That jump is suspicious and should get our attention.


One reason may be that the last quarter saw tech stocks getting crushed, and this is just a dead-cat bounce reaction that won’t last long.

Crypto Overbought Warning Signs

It’s fair to say that bitcoin and cryptocurrency can lump into the tech category. If you assume that, looking at the TRi Breadth Histogram, we can see that crypto went overbought in both the medium and short term. The classic stock market expression is “Too far, too fast” and is a tell-tale sign of a dead-cat bounce.




Read more about Sector Rotation and try the interactive charts over at https://stockcharts.com/freecharts

Learn how to trade the market and build a professional trading plan at therationalinvestor.com/learn or start a 30-day free trial at join.therationalinvestor.com/trial

Learn how to trade the market and build a professional trading plan at therationalinvestor.com/learn or start a 30-day free trial at join.therationalinvestor.com/trial


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