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Smart Money Shows Their Hand in this Q4 2-Week Sector Rotation Analysis [Oct 2022]

Smart Money Shows Their Hand in this Q4 2-Week Sector Rotation Analysis [Oct 2022]


We’re now into the first two weeks of Q4, and we can analyze the Sector Rotation Model to see where the “smart” money is thinking about playing their cards.

Sector Rotation Model Explained

Money managers use the Sector Rotation Model to time the market based on economic cycles. The theory is based on Sam Stovall’s S&P’s Guide to Sector Rotation and states that different sectors are stronger at various points in the economic cycle.

We are using this site to look at the sector rotation model:$SPX,XLY,XLC,XLK,XLI,XLB,XLE,XLP,XLV,XLU,XLF,XLRE

To make your chart look like ours, click the Show Histogram Chart and then Lock to Y-Axis.

Conflicting Sector Rotation Study

Now there are conflicting messages about the economic cycle. At the start of Q3, the model showed strength in technology and discretionary, suggesting a recovery and market bottom. Now in Q4, the first 2-week study suggests strength in energy, signaling a market top and full recovery.

"An Anomaly" ... "Won't Last Long"

In our last sector rotation study for Q3 we pointed out the suspicious jump from Healthcare/Utilities/Cons. Staples, straight to Technology and Discretionary, by-passing real estate and financials.

From the blog. “There may be an anomaly that isn’t adding up because this doesn’t quite make sense.” Then further down in the post. “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.”

This would have meant we’re in full recession with the market bottoming, where financials would do well, and the Fed is finishing raising rates or may lower them. Looking at the complete Q3 study, the only performer was discretionary. If the market was in full recession, the Fed should finish raising interest rates or even lower them.

Now in Q4, we have flip-flopped back to Energy outperforming. The part of the market that does well in recessions and market bottoms is now doing horribly. And the part of the market that is strongest now is the part that does well into full recovery and market tops.

In this environment, the market tops, and the economy heads into full recovery, with interest rates rising rapidly. This is where energy, consumer staples, and healthcare do well, with utilities, financials, and real estate not too far down the road. The major sell-off in the last quarter also suggests the financial market is a little overdone, and in the medium term, the financials should do better.

With any economic study, remember to follow your plan and use both fundamental and technical reasons for risking your money in the market. Follow the two rational rules for investing, and always #pma4tw!

Is the study for this quarter accurate? Only time will tell. Watch the Daily Brief clip, where Brian explains his thinking in more detail.

Read more about Sector Rotation and try the interactive charts over at

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