As we head into Q4 2023, it’s time to see where the money managers–aka. the smart money–are allocating their funds. We do this by looking at Sector Rotation, an investment strategy based on Sam Stovall’s S&P guide to Sector Rotation that suggests different sectors are stronger at different points in the economic cycle.

Related: Read a past TRI blog on how to use the Sector Rotation Model.

Brian commented on the Q4’23 first two-week study, which supports our understanding of sector rotation. He shows that interest rates may reach their peak, and the Fed is achieving its economic objectives as the economy undergoes changes.

The first two weeks’ price performance of every quarter is important to follow because it’s the window in which large fund managers (like pension funds) allocate enormous sums of money to be invested in the market.

Considering their large research departments, pension funds are the ‘smart money’ in the market and often have an accurate idea of where the economy is going, and where we are in the economic cycle.

Following where these ‘smart money’ pension funds are putting their money gives us an ‘edge’ that helps us understand where the economy/market is going and helps us focus our attention on areas that are likely to outperform and areas to avoid that are most like to underperform based on the Pension fund’s ‘smart money’ research.

Access to the sector rotation model via this custom ink:

Change your view to “Show Histogram Chart” and right click then “Lock Y Axis”.

In the first two weeks of Q4’23, utilities show the most strength. This tells us a lot about where we are in the economic cycle, and where the ‘smart money’ is focusing, giving us a gauge of money flow for the quarter.

An inverted yield curve serves as an early indicator of a recession. Given the strength of utilities, considered a safe-haven during challenging times, this inversion supports the idea that an early recession may be underway.

The strength of the Utilities sector suggests we might be entering the early stages of a recession in the business cycle (represented by blue) and transitioning into a bear market (represented by orange).

An inverted yield curve serves as an early indicator of a recession. Given the strength of utilities, considered a safe-haven during challenging times, this inversion supports the idea that an early recession may be underway.

October 13th 2023 - Inverted

A flat/inverted yield curve serves as an early indicator of a recession. Given the strength of utilities, considered a safe-haven during challenging times, this inversion supports the idea that an early recession may be underway.

Q4 2023’s sector rotation analysis, emphasizing the Utilities sector’s prominence, suggests we might be entering the early stages of a recession in the business cycle and transitioning into a bear market. The US Treasury Yield Curve’s inversion, a common indicator of looming downturns, corroborated this.

You can improve your knowledge by checking out our ‘10 Market Cycles’ infographic. It simplifies the complexities of market cycles and is useful for both new and experienced investors.

To explore sector rotation further, we suggest reading 'Sector rotation analysis for Q4 2022,' to compare insights with our current Q4 2023 analysis. Also, 'How to use the sector rotation model' is a helpful guide that introduces you to the fundamental principles of sector rotation.

For those interested in advancing their trading knowledge, The Rational Investor School is a structured three-tiered program tailored to cater to every level of trader. We cover the ‘Sector Rotation’ model in our Level 3 program. Explore The Rational Investor School Program and become part of our dedicated trading community.