It’s Monday, I got my Christmas lights up finally and that means we are in the final weeks of 2022.
Man, time flies.
But it’s time to start laying out what to expect in 2023.
It’s going to be volatile, but I have two sectors that are set to outperform the rest.
In this outlook, I’m using my go-to charting tools: the relative rotation graph, RRG for short.
It analyzes the relative strength of a stock or ETF, 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 a monthly RRG chart to spot two sectors that are set to lead the market in 2023.
Here’s what to watch…
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What I’m looking for on this chart, whether it’s a daily, weekly or monthly outlook, are stocks or ETFs at the edges on the bottom left or top right.
This is where turning points occur.
Turning points in momentum that cause the underlying assets to change trends for about 8-10 periods.
On a daily chart, that’s 8-10 days. On a weekly chart, it’s 8-10 weeks. And on a monthly chart, that’s 8-10 months.
So with this chart, we can get a good feel for how these major sectors of the market are going to trend in 2023.
Energy, for example, tracked by the XLE, is set to underperform.
It’s moving from the top right, the leading quadrant, and pointing lower towards weakening that will drive the sector lower in the months ahead.
Outside of an all-out market crash, which is still in the cards, there’s two ETFs that are set to outperform in 2023 – the Consumer Discretionary ETF (NYSE: XLY) and Technology ETF (NYSE: XLK).
Outperforming Doesn’t Mean Winning
That’s one point I want to make.
Just because these two sectors are set to outperform, it doesn’t mean these sectors are locking in big gains.
In a bear market, it could simply mean we don’t lose as much money, which is still extremely important.
Both sectors are lagging on the monthly RRG but are starting to make that upwards turn.
In the months ahead, look for these stocks to bottom first, and begin to lead the next wave higher, or drop less if we get another crash.
Overall, I’m staying bearish despite the market rally.
So maybe you care more about the weakness expected in XLE from the chart, along with financials (XLF).
The good news is you don’t have to play just one side of the market.
Don’t let the latest move higher fool you, this is still a bear market. And all we care about is profits.
Let’s get it!
Chad Shoop, CMT
Editor, Bank It or Tank It ELITE