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Materials and Industrials emerging as the next leadership sectors

After numerous delays, the House finally passed the $1.2 trillion bipartisan infrastructure bill on Friday, 11/5/21. The bill now goes to President Biden for his signature. The heart of the revamped infrastructure package centers upon around $550 billion in new funding toward transportation, broadband, and utilities.


The infrastructure bill will focus heavily on repairing and rebuilding roads, bridges, airports, and ports. It will also expand the broadband infrastructure in areas with limited internet service. Upgrade the country’s power grid and power infrastructure to deliver clean energy. Improve public transit infrastructure and provide clean water by replacing lead pipes.


There will be winners and losers from the new infrastructure bill. The upgrading of the US physical infrastructure system favors the Materials and Industrial sectors.


The recent Relative Rotation Graph (RRG) study for the eight weeks ending on November 8, 2021, clearly shows Energy (XLE), Consumer Discretionary (XLY), and Financials (XLF) holding current market leadership roles as evidenced by their positioning with the Leading Quadrant. However, two S&P sectors – Materials (XLB) and S&P Industrial (XLI) have risen into the Improving Quadrant, suggesting emerging leaderships.


XLE, XLY, and XLY broke out above their respective technical bases many weeks ago. On the other hand, XLI broke out last Friday, 11/5/21, above its prior 5/10/21 all-time high (106.13). XLB also cleared its 5/10/21 record high (88.44) yesterday (11/8/21). The relative strengths for these previous lagging S&P sectors have also improved, signaling the start of rising relative strengths versus their S&P peers.


Seasonality factors also support money flowing into XLI and XLB for the next two months. In the past twenty years, XLI has recorded average gains of 3.6% during November and 0.6% for December. XLB also generated stellar average gains of 3.4% during November and 1.3% for December.


The passage of the $1.2 Trillion infrastructure bill may be a catalyst to trigger the next sector rotation. However, there is technical evidence to support a change in sector leadership roles. The technical breakouts in XLI and XLB over the past few days suggest the rotation has just begun. Improving relative strengths also indicates this is an early call. Favorable seasonality factors and attractive risk/reward profiles are also helpful. It may be time for investors to overweight XLI and XLB heading into the end of the year and early 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


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