Sector rotations are part of investing. In a year filled with twists and turns, changes in sector leaderships can become increasingly unpredictable. Although each business cycle is different, sector rotations often follow the business cycle moving from the early expansion, to the mid expansion, then to the early contraction, and finally to the late contraction.
The big story earlier in the week was the rotation from growth into value stocks. However, behind the scenes, there is another development attracting widespread attention. Just below the surface, a shift in relative leadership is occurring within the different industries of the Technology sector, at least from a near-to-medium term perspective.
While the recent selling is in the mega-cap Technology and the stay-at-home stocks, other technology-related stocks and Technology industry groups quietly traded to new all-time highs. For instance, the Relative Rotation Graph (RRG) study of the eleven S&P 500 sectors continue to show money flowing out of the S&P 500 Technology sector (XLK) as the group moves deeper into the Weakening Quadrant. The S&P 500 Communication Services sector (XLC) has also slipped into the Lagging Quadrant, confirming further consolidation. The above technical conditions strongly suggest Technology and Communication Services sectors remain in corrective phases.
Although the S&P 500 Technology sector may be under selling pressure, a deep dive into the different industry groups within Technology suggests investors have not entirely abandoned the sector. There are industry rotations taking place within the broader Technology sector.
The RRG study hints at investors favoring two Technology industries - the Semiconductor and Semiconductor Equipment industry and the Electronic Equipment, Instruments, and Components industry as both are currently entrenched within the Leading Quadrant.
The outflows are noticeable in four Technology industries, as evidenced by these industries residing in the Weakening and Lagging Quadrant. Investors continue to shy away from the Technology Hardware, Storage and Peripherals subindustry, where AAPL remains one of the largest components, and to a lesser extent in the Software subindustry, where MSFT remains a pivotal name. In the Lagging Quadrant, the Communications Equipment industry and the IT Services industry continue to struggle. However, the Communications Equipment industry is starting to show signs of improving relative momentum but needs further technical work before it can move into the Improving Quadrant.
In summary, although the Technology and Communication Service sectors retain long-term secular growth trends, there are visible rotations out of two Technology industries, at least from a near-to-medium term perspective. Investors continue to move out of the Technology Hardware, Storage, and Peripherals (AAPL) and a lesser extent, the Software industry (MSFT). The big rotation within Technology currently favors the Semiconductor and Semiconductor Equipment industry and the Electronic Equipment, Instruments, and Components industry.
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