Beware This Rotation

Call it profit taking, call it sectors rotation, the sudden increase in volatility that hit Wall Street just at the dawn of the last month of the year deserves some attention.

Most of 2017 has been spent in an uptrend driven by the Technology sector and no significant drop hit the market during the year. Another peculiarity of 2017 has been the constant decrease in correlation among sectors: most stocks usually follow a common trend, not this year. The chart in figure 1 compares the correlation coefficients at three months of ten leading sectors versus the market, as they were at the beginning of 2016 and at the end of November 2017. Most of them stood at the highest readings two year ago, an average of 0.8, the same average is less than 0.4 now.

Figure 1: Correlation at three months between the main sectors ETFs and the market (S&P500). Most were strongly correlated at the beginning of 2016 (blue line). Correlations had dropped to much less significant levels until last week (yellow line). Source: Tomaselli-Vivanti Analysis – Chur (CH)

The chart of Figure 2 is self-explaining. It compares two sectors ETFs traded at Wall Street: the Technology sector in the upper window (XLK) and the Consumer Staples below (XLP). The red line at the bottom of the chart is the relative trend of Techs against Staples.

Different reasons explain this move in the market:

· tech stocks increased a lot, some of them more than doubled, profit taking before the Holiday season is understandable.

· The tax reform is on the way and certain sectors would benefit more than other, especially the banks but also transportation companies, and these sectors rose when techs corrected during the week.

The comparative chart of Figure 2 is quite significant: the correction in the Technology sector does not compromises the long term trend yet, although a cyclical top is forming on the year’s highs. Yet, the Consumer Staples, a traditionally defensive sector that has been left behind most of the year, has been trending down since June and is now in a trend-reversal. The consequence is a change in relative strength of Technology against Consumer Staples.

Figure 2: ETF U.S. Technology (XLK) in the upper window (XLK). Consumer Staples below (XLP). The red line at the bottom of the chart is the relative trend of Techs against Staples. Source: Tomaselli-Vivanti Analysis – Chur (CH)

The market is anticipating sector rotation, a recurring phenomenon that is likely to announce new developments in the bullish cycle. It does not mean that the trend is over but it could change in mood and volatility during the months ahead.

Alberto VIVANTI – SAMT Vice President – Graubünden and Liechtenstein Chapter– alberto.vivanti@samt-org.ch

Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.