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Leaders, Laggards, Improving, and Weakening Sectors

With less than 2-weeks before the end of the year and US stocks recording one of its strongest gains in recent years, we have decided to compile statistics on the 11 major S&P 500 sectors and US Dow Jones sub-industries. The objective is not only to show the year-to-date performances but to identify the potential rotations into the end of the year (window dressing/tax loss harvesting) and most important, the potential rotations for next year.


As of 12/17/19, SPX has gained 28.58% YTD. Four major S&P 500 sectors have outperformed the benchmark index including S&P Technology (XLK – 46.78%), Financial (XLF – 31.89%), Communication Services (XLC – 29.30%), and Industrials (XLI – 28.63%). The laggards were concentrated within commodities related sectors such as Energy (XLE – 9.45%) and Materials (22.18%) as well as among the defensive related sectors such as Healthcare (XLV – 19.18%), Real Estate (XLRE – 23.35%, and Consumer Staples (XLP – 26.24%).


We suspect heading into the end the year the current S&P 500 sector leaders will likely retain their leadership roles as investors mark up their portfolios with the leaders. Since there are no major S&P 500 sectors in the red, investors may defer their tax loss harvesting and selling into next year. Regarding positioning client portfolios for next year, we anticipate the laggards this year may also begin to play catch to the leaders. However, it is important to recognize because a sector, industry group, or a security has underperformed this year, it does not necessarily mean that this sector will outperform its peers the next year.


Relative Rotation Graphs (RRG) is a technical indicator that enables investors an easy way to visually view the relative strengths and relative price momentums of various securities including indexes, sectors, industries, and individual securities applied against each other as well as against a benchmark index. It gives investors yet another technical tool to the identify relative trends and rotations developing within a universe of defined securities.


One of the reasons we run RRG on the 11 major S&P 500 sectors and the US Dow Jones sub-industry groups is to provide a brief overview (big picture) of the current rotations in the marketplace. However, where RRG is becomes useful, in our view, is its ability to identify the sectors/sub-industry groups entering the leading/improving quadrants as they may be buying opportunities for traders and investors. In addition, the sectors/sub-industry groups moving into the weakening/lagging quadrants may also represent potential selling situations.


The RRG charts show the current rotations as follows:


Leading Quadrant: Technology (XLK), Financial (XLF), Health Care (XLV), and Industrial (XLI). The technical value plays for next year may come from Healthcare and Industrials.


Weakening Quadrant: None


Lagging Quadrant: Real Estate (XLRE), Utilities (XLU), Consumer Discretionary (XLY), Consumer Discretionary (XLY), Consumer Staples (XLP), Materials (XLB), and Communication (XLC). The technical value plays for next year may come from Consumer Discretionary and Materials.


Improving Quadrant: Energy (XLE). The Energy sector is also a potential value play for next year.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com

Source: Courttesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com


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