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By: Chris Rowe — January 18, 2017

4 Sectors With Post-Election Weakness

This week's market stance:

Short-term traders want to wait for a pullback to establish positions and long-term investors want to manage positions by exiting the weak and hedge the rest.  Odds favor small near-term dips in a continued strong bull market.

The technical term "overbought" certainly doesn't mean "over".  It's a preceding condition to a sell signal. While we are seeing many "overbought market" signals, the "sell signal" is not given until the indicators reverse down back below overbought territory.

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4 Sectors With Post-Election Weakness

I try not to hang out with investors who try to predict.  When I hear them speak or read their emails, I tune them out no matter how much I like them.

(My apologies to those friends who are now wondering if it's you).2017-01-05_17-24-19

Investors who predict and forecast are saying the following:

"I know something about the economy or a company that is so earth shattering that, as soon as the biggest, smartest, savviest investors in the world 'get it', their buying will cause market prices to move dramatically."

Recap:

  • They know something nobody else knows - not even the people who can afford to pay tens of millions of dollars to research firms.
  • They also know that this will ultimately be revealed to the world.
  • They also know that this will be understood by the public.
  • They also know how millions of individual investors and thousands of institutions will behave, once they catch wind of the knowledge.

So the next time someone claims to have a "forecast" about the financial markets, you should expect them to have 100% of their money invested in it and nothing else.  Because, seriously, how often does an investor come across such an opportunity.

Also, feel thankful because they must have only told you about it. (Obviously prices haven't shot higher yet, right?  Ha.)

So predictions, forecasts, witchcraft - all are approaches that many use.  In fact, most people actually use them.  At least they claim to.

But, as an experienced money manager, who talks to a hundred people at the top of their respective chains (famous money managers and  analysts), I'm here to tell you they are mostly "closet technicicans".

I'm not saying they're liars.  Some of them actually believe their own bull.

They come up with a fundamental theory on why XYZ should happen but they "confirm the theory" with technical analysis.  Or they use technical analysis to determine what they may deem the "likely next move" and they come up with a supporting story.  Or they get lucky.

 

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When they have a compelling fundamental argument about economics or financials, the win appears as a much sexier and more genius win.

When said famous analysts and fund managers do have success, the next high probability bet you should make would be a friendly wager that the expert's marketing department will throw the success in as many faces as possible.

You can even place that wager with 10-1 odds... it's a lock.

The investment expert's marketing experts who have written books on marketing and spend 90% of their time thinking about human psychology, know how to engrave these genius winners in your mind.

But the truth is anyone can see the institutional footprints that indicate the current market condition (and that of the likely near-future condition).

Let's Talk About Reality

Let's talk about The True Market and how people really make money in the financial markets.

Markets are controlled by institutions.  Institutions have too much money to focus on one stock at a time so they tend to focus on groups of stocks, which is why my main focus is on sector rotation and sector relative strength.

The trends are so much more stable than individual stocks, and one can profit just as much.

The chart, below, is a Relative Rotation Graph that I pulled from stockcharts.com. You don't need to be an expert to understand the following...

The data you're looking at encompasses the 10-weeks (50-days) ending November 4th, four days before election day.

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The securities tracked, above, are the 9 SPDR sector exchange traded funds.  It's basically the S&P 500, broken down into 9 industry groups.

We can clearly see the sector price behavior for 10-weeks leading up to election week.  We saw the 5 sectors experiencing the pre-election weakness (red), 3 sectors with pre-election strength (green) and one on the strong side but in the middle (yellow), nonetheless.

Without turning this into a lesson on the Relative Rotation Graph, suffice it to say that it tracks the relative price strength of different securities.

The strongest sectors are in the top right and the weakest are on the lower left.  A sector moving from weak, to improving, to strong, to getting weaker, back to weak again, would produce a dot moving in a clockwise circle.

The dots, which move as markets evolve, are where the securities are and the tails they have show where they came from.  You can even see ten very small dots within the tails, denoting each of the 10 weeks' strength history.

Each of the nine larger dots represent the sector ETFs, in terms of their price strength relative to the general stock market (S&P 500).  If you want a full lesson, stockcharts.com has one here.

But the point is this...

The chart, above, shows the sectors' performance for the 10 weeks, leading up to the election.  So we know which sectors were in the green:

  1. XLE (Energy stocks)
  2. XLF (Financial stocks)
  3. XLK (Technology stocks)

Right on the line, separating the green "leading" area from the yellow "weakening" section, is XLI (Industrial stocks).  Note that "weakening" still means the sector is stronger than the general stock market (S&P 500).

Now, of course, there was that last minute "surprise", when Trump won the election.

So of course, due to the election surprise, we would have seen some major surprises from price behavior of the nine sector ETFs, right?

2017-01-18_14-23-27

Wrong.

Three of the four sectors that were already the leaders simply became even stronger.

Technology (XLK), which already had a huge run, as the #1 strongest in the 12 months prior, lost some relative strength to the other three leaders.  But it still has long-term legs and should not be abandoned yet.

2017-01-18_13-30-45

Four out of the five sectors showing pre-election weakness are showing post-election weakness.

Moving from the "weak" quadrant to the "leaders" was Basic Materials.

Regular readers of True Market Insider or paying members of Sector Focus, know that we have been bullish on the Steel sector (and commodities in general) for much of last year.

We were already bullish on XLB (Basic Materials) because we focus on the long-term relative strength of the six major asset classes.

Currently, here's how they are ranked:

2017-01-18_14-42-27Commodities moved up from last place, one year ago, to first place but was taken out by U.S. Stocks which now has a massive lead as the #1 strongest asset class.

The point is this - institutional investors control the stock market.  They were seen, by us and by our subscribers, buying the "post election" winners long before the election.  Even if you had the election results weeks ahead of time, that knowledge doesn't give us a more solid sense of likely future price behavior as simply identifying current and recent trends in price strength.

Recent past price behavior is the #1 best "predictor" of future price behavior.  So we buy and hold the leaders until they're no longer leaders.

The 4 post-election laggards

Some investors bought the weak sectors, in the lower left quadrant, predicting the rest of the world would eventually catch up with their wisdom and buy until those groups went up.

Perhaps those hundred billion dollar fund managers will get hip to that  knowledge soon.

Any day now.   Any day.

2017-01-18_17-38-23

 

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