To start with, I apologize for my absence this week. I caught one thing that appeared like Covid, and felt like Covid, but it surely didn’t establish (pun supposed) as Covid. Other than feeling awful, additionally my voice was gone, so making a video was not a good suggestion.

I get again into the trenches now (not 100% but), no less than with this quick article, after an eventful week marked by a historic rate of interest resolution.

What’s taking place in sector rotation?

The weekly Relative Rotation Graph for US sectors above largely exhibits a continuation of the rotations set in movement a couple of weeks in the past.

There was a small improve within the power and Communication Companies sectors. Vitality is much to the left contained in the lagging quadrant and, based mostly on RS-Ratio, the weakest sector for the time being. Communication Companies could be very near the benchmark and on a really quick tail, which has additionally been fairly erratic over the previous couple of weeks.

The Actual Property sector contained in the main quadrant misplaced some steam (upside momentum), however based mostly on RS-Ratio, it’s nonetheless the strongest sector.

All different sectors stay on the identical trajectory, with XLU, XLP, XLF, and XLV main the dance into the main quadrant. When slicing the sector universe into offensive, defensive, and delicate, which means that all defensive sectors are contained in the main quadrant and touring at a powerful RRG heading.

Then, there are two offensive sectors additionally contained in the main quadrant: Financials and Actual Property, that are additionally very curiosity rate-driven sectors.

All delicate sectors (XLI, XLE, XLK, XLC) are on the left hand facet of the graph with solely XLI exhibiting a constructive RRG heading.

Dilemma

However here is my dilemma: The market’s response has been fairly bullish up to now, with SPY breaking by way of overhead resistance this week. It just about ignores the defensive sector rotation but additionally the sturdy adverse divergences between worth and RSI/MACD.

So, do I waft within the upward break and name off any threat for corrective motion? Or do I stand by the evaluation from a defensive sector rotation and fairly sturdy divergence indicators from classical technical indicators for a bit longer and attempt to see by way of the present bullishness?

Here is the S&P chart, which exhibits the run-up to the late 2021 peak and the present market habits.

The 2 charts above present the market habits of 2021 as much as the week of the upward break aligned with the present market.

These two RRGs present the rotation for defensive sectors across the peak in 2021-22 and the present.

Worth Pays, however Do not Guess The Farm

I’m the primary to confess that worth pays, and you can’t purchase the RSI or the MACD. Nonetheless, historical past makes me suppose that long-lasting adverse divergences between worth and these indicators, as we see them now, have confirmed to be fairly dependable—dependable sufficient for me to not go all-in and wager the farm on the upside.

Mix that with the present defensive sector rotation and the sturdy resemblance to the setup shortly earlier than the market peaked in early 2022, and I strongly lean towards a “Let’s have a look at how this performs out in coming weeks” method.

#StayAlert (and do not get sick ;), have an incredible weekend. –Julius