Laggards Are New Leaders: Sector Rotation

JC Parets
September 13, 2020

When money is coming out of one sector and going into another one, we call that sector rotation. It's a classic characteristic of a bull market, or for that matter, a market where we are generally being rewarded for owning stocks, not for selling them.

Let's go back to February. At that point, we were seeing laggards dragging the market lower. Things like Financials and Materials were making new relative lows and had already begun their declines. In fact, both of these sectors peaked in December, months before the overall market peaked. That's part of why we got so bearish.

So anyone who tells you that this year's crash "came out of nowhere", is really just fooling themselves. This year's stock market crash came after more warning signs than any crash in U.S. history. I've said it before and I'll stand by that.

The reason I bring this up is not to take a victory lap. That doesn't add any value. My point here is that today we are seeing the exact opposite of what we saw then. The laggards were lagging and dragging back then. Today, those laggards are the leaders!

Financials are hitting new relative highs, NOT new lows (like they were in February).

Materials are making new all-time highs! And after doing nothing for 32 months, the higher probability here is that Materials are just getting started!

Who's pulling Materials higher? Look at Chemicals breaking out of this monster base to new all-time highs:

Here's how these guys look on a relative basis:

Outside of Chemicals, it's hard not to think of Freeport-McMoRan when we're talking about Materials. And what is $FCX doing?

New Multi-year highs for the 3rd consecutive week:

There are serious global implications here as you can see above. If emerging markets are ripping higher and money is rotating into the lagging sectors (that needed to see rotation, I might add), then what does that mean for equities as an asset class?

Higher or lower?

To me it means higher! And probably much higher!

So we're spending our time looking for stocks to buy.

You can find that list here (Premium).

The best part of this whole thing, in my opinion, is that since a lot of these names we're describing have relatively small weightings in the major U.S. indexes, you see the lazy talking about market crashes and "Tech Wrecks", and they're totally missing the rip-your-face-off rallies taking place outside of Tech.

We call this Headupyoass syndrome. Because think about it, if your head is up your ass, then you can't see what's really going on, even if it's right in front of you.

That's how I see it. Let me know what you think!

JC

 

 

September Conference Call Details

A reminder for Premium members to sign up for September's Conference Call. This month's call is set for Tuesday, September 15 at 6pm Eastern Time. Register by signing up via this link here. As always, if you cannot make the call live, we’ll have video and slides up on our Conference Call page.

 

Filed Under: