Money Rotates Into Late Cycle Names

The recent rotation we’ve seen into some of the more traditional late cycle sectors is something we probably shouldn’t ignore. This is a topic that I’ve brought up a few times this week as Energy broke out to new all-time highs and is also showing strength against the early cycle sectors.

My friend and excellent market technician JC O’hara from FBN Securities sent over a note on Thursday where dives deep into the consequences of this rotation. He prefers that I refer to him as, “The Real JC”, so we’ll throw him a bone in order to stay on his distribution list!

The Real JC’s first chart shows the performance of each sector for the 90 days prior to the April high in S&P500. Look at the leadership. Money is flowing heavily into Utilities and Energy more recently. The weakness out of the early cycle sectors like Discretionaries, Financials and Tech is something we have to take note of:

4-17-14 sectors 90 days prior to peak

“The recent sector performance has been troublesome. It is not an encouraging sign to see the market being led by utilities. Even more concerning is the lack of performance in Discretionary, Industrials and Financials. The last 90 days we have seen just that. Examining prior market peaks (too early to confirm we are currently at one), we note that Discretionary weakness combined with Utility outperformance was a forewarning of market weakness to come. Smart money hides in Utilities, Staples, Health Care and Energy, while Financials, Discretionary and Technology get hit the hardest. While there has certainly been active sector rotation from 2013, the market has not turned lower yet. If the recent sector performance is a canary in the coal mine, we expect to see shallow bounces where traders lighten up on their riskier assets, and continue to rotate money into the historical sectors that held up the best.”

The next chart show’s the sector performance for the 90 days prior and 90 days after the 2007 stock market peak. Look how well the defensive sectors held up after the top. Also notice the relative weakness in Discretionary and Financials ahead of that market top (click chart to embiggen):

4-17-14 sectors 90 days prior to 07 peak

Here is the same chart, but for the market peak in 2000. Discretionary once again hinted at market weakness while the strength in Utilities forewarned of upcoming weakness for the major averages (click chart to embiggen):

4-17-14 sectors 90 days prior to 00 peak

JC O’Hara sent this over to me at what I think is the perfect time to point out this rotation. This seems all too similar to prior market peaks. We’re going to want to see Financials, Tech and Discretionaries start to turn back up on a relative basis in order to take this scenario out of the equation. But the consistent underpermance out of these sectors and money flow into Utilities and Energy can’t be ignored. The market is speaking. Are you listening?





FBN Technical Update – Sector Performance Pre & Post Peaks