Saturday, October 24, 2009

A Look at Recent Sector Rotation

In recent posts, I've highlighted resources for decision support for traders. One longstanding resource that I've relied upon is Decision Point. The site has the largest collection of indicator charts that I've encountered, with superior coverage of sectors and individual indexes. Flipping through the charts at the end of the week provides an excellent orientation to the market's larger picture.

Above, I've taken sector data from Decision Point and charted them in Excel to show how the stocks within each sector are trading relative to their 20-day exponential moving averages.

As noted during the past week, we've been in a multiday trading range. Such range environments are created when sector rotation becomes a greater source of movement than directional index movement. In other words, institutional investors aren't so much pulling money out of stocks or putting cash into them as reallocating their existing holdings.

From the chart above, we can see that energy shares have been the great beneficiary of this reallocation, with formerly strong materials stocks now the laggards of the S&P 500 sectors. We can also see that consumer and industrial shares have also seen favor, responding to improving economic news.

At a broader level, we have 53% of S&P 500 large cap issues trading above their 20-day EMAs, but only 36% of S&P 600 small caps. It may well be that larger international companies that benefit from overseas sales are beginning to take the lead from companies less likely to benefit from a falling U.S. dollar.