Let’s kick off this week with a look at the Relative Rotation Graph (RRG).
In it, we will see exactly which sectors are set to outperform over the next 10 days, and which sectors are set to weaken.
For starters, not every sector is at a pivotal rotation point, and that’s okay.
I want to share the ten major sectors of the S&P 500 with you, where they are heading and what it means based on the chart.
But our focus will be on just two – the consumer staples sector and tech sectors.
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Utilities (XLU), Healthcare (XLV), Materials (XLB), Real Estate (XLRE), Financials (XLF), Industrials (XLI) Consumer Staples (XLP) and Consumer Discretionary (XLY) are all showing short-term strength.
Seems like a lot, with just two on the outside of this track (the energy and tech sectors), but keep in mind a few things.
It’s relative to the S&P 500. So, if the S&P is going lower, these sectors are just expected to outperform.
The other thing, these trends can reverse any day. It doesn’t take much to reverse it and show weakness. Especially since that likely starts a day or two before it is picked up on the RRG.
So we don’t want to read too much into some of these.
Instead, we want to focus on just two – the improving consumer staples sector and weakening tech sector.
Staples Strong, Tech Weak
The Consumer Staples sector is sitting in the furthest spot to the left, creeping higher in the lagging quadrant.
We know from the rotation of the RRG, that the sectors and individual stocks, tend to rotate clockwise, from lagging (bottom left), to improving (top left), then leading (top right) before it falls to weakening (bottom right) and back to lagging.
It’s evident over every time frame, every stock, every sector, it’s inevitable.
That’s what we are looking for and why the XLP and XLK are the two sectors we want to watch over the next two weeks, to two months.
The XLP is on the verge of entering the improving quadrant, likely set on a path to leading as we look at the first week of July.
That could set up a solid run for the safe-haven sector and the stocks within it.
XLK is making the opposite move, falling from leading into weakening on Friday.
The tech sector is showing weakness already and could hit lagging in the next week or two.
The takeaway here, is to go long, or stay bullish on XLP and stocks within it. Now is not the time to bail.
And to turn short-term bearish on XLK. It doesn’t mean to short tech stocks into the end of the year, just means you may get a great buying opportunity over the next month or so.
Short-term moves, require short-term trades, or simply patience as you go through the counter trend on your trade.
Regards,
Chad Shoop, CMT
Editor, Bank It or Tank It ELITE