Happy Monday everyone!
As we kick off a new week, we are looking for Friday’s momentum to carryover early on.
That will be crucial to setting up the next bear market rally.
So…
With a rally in the works, more than likely, where are we looking for profits?
One of my go-to charting tools is the relative rotation graph, RRG for short. It analyzes the relative strength of a stock, to a particular focus point. In most cases, that’s the S&P 500, the most popular index to track.
Then, it takes the momentum of that relative strength to create the unique graph you’ll see below.
If you want to learn more about how it works, you can click here to view a short video.
For today, we’ll look at this chart to spot a sector that is set to make a big move in the latest market rally.
Here’s what to watch…
Consumer Discretionary Stocks are on the Move
On the RRG today, I have the main sectors that make up the S&P 500, rotating around the index.
A few notes. The further away from the center, the more volatility you can expect. And the larger space between days, you can expect bigger moves.
As I look at the chart below, going into a rally, I’m looking for sectors that are moving out of the lagging quadrant (bottom left) and into the improving quadrant (top left). This sets up a rotation that usually will carry that sector into the leading quadrant (top right) in the days ahead.
That’s the sweet spot for the biggest returns.
And right now, a top sector is making that move – consumer discretionary.
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The Consumer Discretionary ETF (NYSE: XLY) is trending in the right direction, moving from lagging towards improving and is setting up to potentially make a big move.
It’s also entering into the holiday season, which is a big boost to consumer discretionary stocks every year.
We can expect those stock to follow that trend for the next few weeks, based on all the data we are taking in.
Other Take Aways from RRG
A few other things to notice are that the tech sector (XLK) is in this area as well. But with just one day of turning higher, you’d like to see a little more before jumping in.
The real estate (XLRE) and utility stocks (XLU) look nice, but I know, generally speaking, the returns from those stocks are going to be capped as opposed to consumer discretionary.
That’s going to offer the biggest returns for us.
And we can expect the energy sector (XLE) to start to weaken against the overall market. It’s coming off a strong period of outperformance but is due to make the rotation through the RRG quadrants.
Those are some areas I’ll keep an eye on in the sort-term as we rotate through this over the next week or two.
But my target is the consumer discretionary sector as we look for those stocks to outperform.
Regards,
Chad Shoop, CMT
Editor, Bank It or Tank It ELITE