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Are Sector Rotations Healthy?

Rising COVID-19 cases in the U.S. and overseas, trade tensions between U.S. and China, uncertainties in the upcoming U.S. Presidential Election, lack of clarity to the next government stimulus package, and the end of the third quarter window dressing have been mentioned as to the primary reasons the market may have peaked in September. Others cite the lack of market breadth and specifically the influence of the top five companies in the S&P 500 Index as another major reason for the current correction.

A brief analysis of the 2020 year-to-date price returns indexed at 100 on 1/2/20 shows that the top five companies (i.e., MSFT, AAPL, AMZN, GOOG, and FB) from the S&P 500 Index are up 34% YTD as compared to the bottom 495 companies which are currently down 4% for the year and the SPX Index is up 2.62% YTD.

So, what will be the key drivers for the sustainability of the U.S. economic recovery and the resumption of the primary bull trend?

Some believe there will not be a second wave to the COVID-19 pandemic or a vaccine will become readily available as early as the end of the year to early next year (2021), a new stimulus bill will be passed by Congress ahead of the U.S. Presidential Election, trade tensions between U.S. and China will begin to subside, and new market leaderships will emerge to prevent the current market decline from escalating into a deep correction or worse, the start of the next bear decline.

Has the market breadth been expanding? And, will the sector rotations from the overbought but secular growth and momentum-based sectors toward the undervalued economically sensitive sectors such as Consumer Discretionary, Industrials, Materials, and others be enough to propel the U.S. stock market to new all-time highs?

S&P Materials (XLB) and S&P Industrials (XLI) are currently up for the month (September) appreciating 2.81% and 0.61%, respectively. This is a near-term positive, but can these and other S&P sectors sustain into the fourth quarter and beyond?

These sectors can temporarily offset the current weakness from Technology/Telecom sectors, growth, and momentum-based sectors? However, because of the large-capitalization weightings of Technology (22.34% market-cap weight of SPX), Communication Services (10.17% Mkt-cap), and Healthcare (13.20%), it would be difficult for SPX and specifically, NDX and COMPQ to set new all-time highs without their active participation.

Source: Courtesy of

Source: Courtesy of EKS Associates

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

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