Sector Rotation Analysis Q3 2021

It’s hard to believe we’re already in Q3 of 2021 but here we are and it’s time to talk Sector Rotation again. Each quarter we look at the first two weeks of the S&P market activity by sector to get a look into where institutional money managers will be directing capital for the next few months. Because these money managers need to allocate capital at the beginning of each quarter, we should see outperformance in the sectors that they are interested in. This information can give us a better understanding of where we currently are in the current cycle. 

The Q3 First Two Weeks Study is as follows:

Consumer Discretionary: -1.03%
Communication Services: -1.04%
Technology: +1.45%
Industrials: -1.35%
Materials: -2.19%
Energy: -11.35%
Staples: +1.67%
Health Care: +1.65%
Utilities: +3.51%
Financials: -2.49%
Real Estate: +3.7%


Sector Rotaton 2 weeks Q3 2021

Sector Rotation Cycle


So far outperformance is most noticeable in Utilities and Real Estate, placing us in “bear market” on the market cycle and “early recession”’ on the economic cycle. While I think it’s a bit early to call a bear market, I do find it interesting that equity indices started selling off coming back from the July 4th week and they have experienced some heaviness since. The sell off continued today with momentum with and even a daily downside key reversal firing on the Dow ETF (DIA). Only time will tell if the current bearishness is a trap but either way I think that traders need to stay on their toes and be mindful of the possibility of a deep correction. Warning signals such as this sector rotation study should be noted and after all this market sure has come a long way. We shouldn’t be surprised to see pullbacks to things like 38.2 Fibonacci retracements. This all seems to coincide well with Brian’s repeated sentiment that the institutions will be pushing the markets lower to force the U.S. Government to pass more stimulus. The markets will take off once the free money is flowing again but until then investors may have to feel some pain. 


DIA key reversal

A look at last quarter’s outcome

In last quarters’ post I was seeing mixed messages and didn’t really have a clear picture of where we were in the cycle. We saw energy outperform through Q4 2020 and Q1 2021 which was suggesting a market top in the cycle but it strongly backed off in our Q2 first two week study down -7.92% before closing out the quarter at +0.08%. Consumer Discretionary led the outperformance in the first two weeks but by the end of the quarter Real Estate was the strongest at +5.32%.  Communication Services and Technology also closed the quarter strong at +2.2% and +2.54% which adds to the mixed signals we saw in Q2. 


Sector Rotation Full Q2 2021



At TRi we would never base a trade on one single idea so simply looking at a sector rotation study would never be enough information for us to act. That said, this study can be a strong indicator of market sentiment and where we may be headed in the future. While Q2 was a bit of an anomaly and difficult to draw any usable information from, I think that the Q3 two weeks study looks more clear and is signaling upcoming bearishness. Together with bearish price action happening in the indices, it’s reasonable to make the argument that equities could struggle in the near term. 


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