A Big Market Rotation Is Happening Right Now…

Today, I want to spend some time looking at a table showing the performance of sectors. It also includes the S&P 500 and S&P 600.

Sectors are a way to group stocks that provide similar goods or services. Looking at sector performance can provide inputs into which parts of the economy are performing well or lagging.

“Leaders” can be defined as sectors that are outperforming the S&P 500, which includes the stocks from each sector. “Laggards” are trailing the S&P 500. I included the S&P 600 because it tracks small-cap stocks, and these stocks have outperformed large-cap stocks in the past year. Several time frames are shown to highlight emerging trends. The table is sorted by one-year performance.

Now, here’s what we can draw from looking at this…

Tech stocks delivered the biggest gains in the past year and have been the worst performer of the past three months. Financials were the worst performers in the past year but the biggest gainers of the past three months.

This is a sign of rotation.

My colleague Jimmy Butts noted the reversal in tech yesterday. And as he pointed out, if this continues, it can be dangerous for traders — because it’s all to easy to get emotionally tied to the large gains the sector has delivered and expect them to resume.

But sector rotation often occurs at important trend reversals. It’s likely in the next few months we will continue to see deterioration in the sectors that led the bull market over the past year.

What The Charts Are Telling Me

This doesn’t mean the inevitable bear market is beginning right now. But the chart of the SPDR S&P 500 ETF (NYSE: SPY) does present some cause for concern.

As some of you may know, I’ve been using candlestick charts quite a bit recently. Well, this is a candlestick chart again. In a candlestick, the open and close are marked by rectangles, which are known as the “body” of the candle. The vertical lines above and below the candlestick are known as “shadows” or “wicks.”

For the second week in a row, we have a “hanging man” candlestick, which is a candle with a relatively small body with a long lower shadow. This tells us to expect a bullish start to the week.

I’ve also drawn some dashed lines in the top right corner of the chart to highlight support and resistance. A breakout from that range should result in a significant price move — higher if SPY breaks out above resistance (top line), lower if it breaks out below support (bottom line).

There’s one more market indicator in the chart above, and that’s my Income Trader Volatility (ITV) indicator. At the end of last week, ITV (red line) had moved solidly above its moving average (blue line). ITV is similar to VIX in that it rises as prices fall, so when we see red indicator line cross over and move above the blue moving average line, it’s bearish.

Finally, we need to look at my Profit Amplifier Momentum (PAM) indicator, which is shown in the bottom panel of the daily chart of SPY below.

At the top right corner, I’ve drawn the same support and resistance lines that I included on the first chart of SPY. In the bottom panel, I’ve shown PAM, which is designed as a short-term indicator.

The weight of the evidence is increasingly bearish. A break above resistance will negate that outlook. A break below support will reinforce that outlook.

Action To Take

This week, it’s important to watch the price action since we are near an important turning point. Keep an eye on the levels I’ve noted above, as they will likely determine the direction we head from here.

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