Where is the Sector Rotation?

One of the characteristics of Bull Markets is Sector Rotation - New leadership emerging as the uptrend continues with different sectors taking turns leading the way. The problem we see in current markets is that defensive sectors have been leading since the February highs. Sure, the major averages exceeded that temporarily, but the leading sectors have still been Consumer Staples and Healthcare - both very defensive.

The Chart below shows the recent action of these sectors relative to the S&P500. Look at these breakouts:

[caption id="attachment_1603" align="aligncenter" width="620" caption="Consumer Staples Relative to S&P500"][/caption]

[caption id="attachment_1604" align="aligncenter" width="620" caption="Healthcare Relative to S&P500"][/caption]

From December through February, we saw an explosive leg of to this bull market in stocks. The leadership was clear: Energy, Financials, Industrials, and Materials. Historically Aggressive sectors. The chart below shows the relative performance of each sector over that time period.

[caption id="attachment_1606" align="aligncenter" width="573" caption="Sector Performance Relative to S&P500"][/caption]

Now look at the relative sector performance since this corrective phase began in mid-February. The former leaders are now the laggards. Financials are struggling, Energy struggling, Industrials, etc. Who have been the leaders? Very defensive sectors: Staples, Healthcare, Utilities. A couple of weeks ago Matt Nesto and I were discussing the potential breakout of the S&P500 through resistance and the necessary sector rotation that was needed for that to occur (See the video here). We have not seen new leadership emerge and that worries me.

[caption id="attachment_1607" align="aligncenter" width="573" caption="Sector Performance Relative to S&P500"][/caption]

Not all is bad news, however. The relative strength that we were seeing in the Consumer Discretionary space, specifically the retailers (ahem $AMZN) is still there and that is a positive. $XLY made new highs for the year against the S&P500 on Friday and was just a few pennies shy of an absolute new high as well. This is encouraging but I would like to see some money flowing into either the commodity based names ($XLB, $XLE, $XLI) and/or Financials ($XLF).

This sector rotation, or lack there of, will be the tell for this market going forward. If Defensive sectors continue to be the leaders, then I can't be all that bullish for the overall market this summer.