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By: Costas Bocelli — January 12, 2022

Our Technical Indicators Have Spoken: There’s a New King of the Mountain

Let the sector rotation begin.

For the second time over a period of a year, Technology has been dethroned as the king of our long-term relative strength rankings among the 11 broad sectors that comprise the U.S. stock market.

Consumer Discretionary picked off the sector back in late January 2021. And just recently, Financials began to rule the roost. The last time this sector earned the #1 ranking was nearly five long years ago in 2017.

What triggers shifts like these? Cycles.

High tide and low tide. Full moon and new moon. Bull market and bear market.

The world moves in cycles. Some are more predictable and more easily identified, while others are somewhat random in their timing and length.

Throw a “going on three-years’ long” pandemic into the mix and determining economic and market cycles can be an exercise in futility, or an invitation to disaster. 

Economic cycles—and where they stop and start—can be very blurry. But that doesn’t mean we’re flying blind.

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Cycles Make the Markets Go Round

Four phases define the basic cycle: expansion, peak, contraction, and recovery. Now, I’m no trained economist, but I’ll venture to say that with inflation running rampant, and interest rate hikes on the horizon, that we’re somewhere between peak and contraction.

Sector rotation and economic cycles go hand in hand. And the stock market tends to reflect whichever phase the economy is in. For that reason, certain sectors can be expected to perform accordingly.

So, of the four stock market phases—accumulation, mark-up, distribution, and mark-down—which one are we in today? 

I’d hazard a guess that, um, actually I’m not going to guess at all.

I think it’s smarter to just look and listen to what our technical indicators are telling us, and take our investment cues from them.

A picture is worth a million words…

And you’ll find the picture you most want to look at by checking the relative strength rankings from our proprietary data platform, Sector Prophets Pro

The indicator below is the Relative Strength Matrix. It compares the relative performance of 45 sub-sectors in terms of relative strength then ranks them according to Buy signals. 

(Click on any image to enlarge)

Right now we find several cyclical- or value-related industry groups (sectors) in the top quartile of the rankings.

We don’t know if sector leadership will shift again tomorrow, next month, or next year. And that’s just fine.

All we need to know is that heading into the new year, money is flowing into Oil & Coal, Oil Services, Banks, Savings & Loans, Forest Products Paper, Steel Iron, Metals Non-Ferrous, and Real Estate.

And money is flowing out of Internet (#25), Computers (#26), Semiconductors (#38), and Software (#39)—four sub-sectors of the broader Technology group.

And growth-related stocks in these sectors are rapidly losing steam. We saw this last week when the tech-heavy Nasdaq 100 index fell 4.5% while the blue-chip, dividend-producing stocks in the Dow Jones Industrial Average remained flat.

So What’s Next?

Will the economy fall off a cliff once the Fed begins selling its stash of bonds and raises interest rates to ward off the 7% annual rate of inflation? No one knows…

With the Fed’s balance sheet approaching $9 trillion, Goldman Sachs is forecasting four 25-bps rate hikes in 2022, beginning as early as March..

It could get ugly, but not for the Financial sector, historically among the most sensitive to changes in interest rates. That’s because profit margins for banks tend to expand as rates climb. The same goes for  insurance companies, brokerage firms, and money managers. And more and more smart money is moving into cyclical, value-focused sectors.

So sub-sectors (those we monitor on SPP) like Banks and Savings & Loans (#3 and #4 on the Relative Strength Matrix) might do particularly well.

In fact, in this week’s “Sector Spotlight,” I highlighted a regional banking ETF that’s up 8% year-to-date, delivers a 2.16% yield, and trades near its 52-week high. 

As you can see from the Sector Alerts SPP generates, Banks went on a new BPI Buy signal on Jan. 4, before switching from a weak Sector Relative Strength designation to strong one on Jan. 7.

The current market shifts are so drastic that my co-editor here at TMI, Tim Fortier, slapped this title on his article, “ The Mother of All Rotations is Happening Now.” You can check it out by clicking here.

I’m seeing the rotation with my own eyes–multiple large, aggressive bullish bets on these sectors in the options’ markets. 

I use a really cool strategy based on a special indicator that looks specifically for these types of bets. And when it finds them, it generates what I call “Shadow Spike Alerts” in real time. 

In fact, just this past Monday I sent an alert to our subscribers about Phillips 66 (PSX). I did that because my special DMI indicator had detected a very aggressive upside bet on the energy stock in the options’ market. 

The trade generated 20% right out of the gate, then tacked on another 2.7% the next day.

If trading, and profiting, alongside these market movers sounds like something you’d like to do, watch a replay of this webinar created by TMI Founder Chris Rowe

You won’t believe how easy DMI is to follow.

Knowing where the smart money is flowing is key. And TMI’s technical indicators are great tools for monitoring changes in demand.

They allow you to stay ahead of the sector rotation curve and keep you invested in the strongest sectors in the market.

Until next time,