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Sector Rotation Quarter 1 2021

The Sector Rotation Model looks at performance by sector to determine where we are in the Business and Economic cycles. This helps us identify which sectors of the stock market are likely to outperform. We can use this information to make decisions about capital allocation and directing funds into areas of the market that are more favorable. In theory, we can outperform the market by anticipating which sector money will be flowing in the near future.

First 2 Weeks Study
At TRI we like to study the first two weeks of every quarter to project where money managers are directing funds for the rest of that quarter. This gives us a fundamental reason to apply to our stock screening process. Our first two weeks study for Q1 2021 looks like this:
Discretionary: +2.18%
Comm. Services: -3.62%
Technology: -2.2%
Industrials: +0.97%
Materials: +3.25%
Energy: +10.79%
Staples: -3.46%
Health Care: +1.73%
Utilities: +1.23%
Financials: +4.57%
Real Estate: +0.89%
Looking at these numbers it is clear that Energy is outperforming by the greatest percentage with Financials and Materials in 2nd and 3rd but only at +4.57% and +3.25% compared to Energy at +10.79%.
The Business and Economic Cycles
The Business Cycle leads the Economic Cycle as investors are trying to anticipate changes in the economy. Energy outperforming this quarter suggests that we are in the Market Top phase of the Business Cycle and moving into Full Recovery in the Economic Cycle. While we’re not seeing a technical top in the market just yet, we have been headed straight up for quite some time and it makes sense that money managers would be preparing for a top by moving capital into the Energy Sector.

Combine Sector Rotation With Technical Analysis
Now that we have a fundamental reason to be interested in Energy we can take a look at the XLE Energy ETF for a potential technical setup. The monthly chart pictured below shows a big W forming in a Reload Zone validating the idea that the Energy Sector may outperform this  quarter. With both fundamental and technical reasons we can consider redirecting capital to the energy sector from other sectors like Discretionary or Technology that are beginning to show topping patterns in their price action.