With the first three quarters of 2017 now in the books, we wanted to take a step back and look at the US stock market from a sector rotation perspective. For the uninitiated, sector rotation is the subset of technical analysis that involves evaluating what types of stocks are performing well to help predict how the stock market as a whole will perform moving forward.
Historically, economically-sensitive sectors technology, material, and energy stocks tend to outperform the stock market in a healthy uptrend, while economically-insensitive sectors like utilities and health care stocks typically outperform when the market is at risk of a pullback. Sam Stovall at CFRA developed the idealized sector rotation model shown below:
Source: Stockcharts.com
Of course, the real world is always much messier than the textbook, but so far this year, we’ve seen strength in the sort of pro-cyclical sectors that suggest the current uptrend remains solidly in the middle innings of a bull market:
Source: Stockcharts.com
Mirroring Stovall’s model above, technology, material, and industrial stocks are among the strongest performers (please see last month’s “Sector Showcase: Healthcare stocks look surprisingly healthy” for an investigation of the relative outperformance of that sector). Meanwhile, the energy sector remains in the dumps through the first nine months of the year (though it has shown signs of improving recently), suggesting that the inflationary pressure that often accompanies “late stage” bull markets is nowhere to be seen as of yet.
Make no mistake: the market environment can change rapidly, especially if we see volatility pick up once again (note that the VIX closed September at just 9.51, the lowest monthly close in history for popular measure of market volatility), but a survey of the current sector landscape shows no signs of concern for bulls as of yet!
