Wednesday, November 16, 2016

Powerful Sector Rotation May Need A Breather

The market action following last week's election has seen powerful rotation among stock market sectors and industries. In my last post I highlighted this movement along with stocks and industries that are benefiting from this rotation and industries that are not benefiting. I noted a potential caution due to the fact the targeted sectors seems to be a consensus trade by investors and the moves may be occurring too quickly. One area benefiting from the rotation is the financial sector at the expense of the technology sector as seen in the below chart.

The lower section in the above chart shows the 14 day relative strength index (RSI) of the ratio, financials divided by technology. The RSI for the ratio has moved into overbought territory, and in this case, indicating the financial sector relative to technology is overbought with the ratio above 70. An area of the technology sector seeing quite a bit of  weakness is the internet related stocks, such as the FANGs: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google aka Alphabet (GOOGL).

The below chart displays the ratio of value stocks versus growth stocks and its chart pattern mirrors that of the financial/technology chart above. The S&P 500 Value Index's top weighted sectors are Financials (25%), Energy (13%), Health Care (12%) and Industrials (11%.). All four of these sectors have been top performing ones since the election.

Lastly, in my last post over the weekend, I provided a list of the companies that have the most cash trapped overseas. One policy Trump favors is to lower the tax companies must pay on this overseas cash if it is repatriated back to the U.S. Certainly some of the cash probably is reinvested in projects in the U.S. and some is likely used for stock buybacks and/or dividends. Again, this has not gone unnoticed by investors. The below chart shows the ratio of the PowerShares Buyback Achievers Portfolio (PKW) versus the S&P 500 Index. Similar to the other ratio charts in this post, the chart pattern looks nearly identical.

For investors then, the new administration has yet to take office and policy implementation will not occur overnight. The weakness seen in some segments of the market may be an area investors want to evaluate for potential opportunities. Conversely, the sectors that have performed well over the last week or so may go through some additional consolidation. Any consolidation may provide an opportunity for investors to add to stocks in these sectors with the belief they will benefit from policies put in place by a Trump administration.

No comments :