Rotation

The US stock market has continued to advance in afterburner fashion over the past few weeks.  Historically seasonal weakness in the August/September windows translated into only a sideways pause in the equity markets.  Once we entered into the seasonally strong October and November period,  stocks exploded on the upside across all of the popular averages.

Even as markets are pushing forward, the chart below shows some interesting changes that may be occurring in leadership.  (all charts from StockCharts.com)

We note the continued outperformance by the Nasdaq listed issues and in particular, the subgroup of the technology sector as shown by XLK in the chart.  We’ve just had a week when many of these strong issues such NVDA and TSLA suffered significant pullbacks over the last few sessions.  While it’s too soon to announce any kind of top there, it’s likely that as the bull market continues to run, other sectors will benefit from money rotating into them from the red hot tech sector.   Notice the slopes of the trend lines at the far right end of the sector charts which are pointing higher even as the slope of XLK and Nasdaq turns down.

 

Another tool which can be used to monitor strength of sectors as well as individual issues are Relative Rotation Graphs.  This is an invention of Julius De Kempenaer.  His very intriguing work and methodology can be found here.  The essence of this methodology shows that companies or sectors can move in and out of momentum favor relative to the overall markets and which can be measured by a quadrant defined charting indicator.

The ‘tails’ left by an issue’s movement will give visual representation of likely trends.  We can apply this methodology to assess any issue at a given time and a mountain of information can be gleaned using this tool.  Readers can contact me for specific groups or issues of interest. For the purposes of discussion today, I am only focusing on a sector that appears to be making a transition into the high momentum zone; and that is, the TSX and TSX venture indices.  Since these types of issues are  usually comprised of resource and oil related issues, that group bears watching for breakouts and relative outperformance.

Up until recently, this area of the markets had been suppressed by significant supply even as the larger US equity markets rallied.  This has changed now and previous resistance is now support.

The steady advance in such issues as CAT and DE; the advance of the housing stocks such as PHM  and the renewed strength in the consumer and retail sectors points to the likelihood that resource issues may be just emerging.  This has implications for numerous other sectors of the stock market, which will be discussed in subsequent articles.

 

 

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