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Defense Wins Championships; as Sector Rotation Continues

David Becker
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Defense Wins Championships; as Sector Rotation Continues

Sector rotations in the US stock space reflect a more defensive market. Utilities and consumer staples are the best performers during April, while discretionary technology and financials are the worst. Utilities and consumer staples, are also dividend-paying groups which do better when bond yields fall as has been the case in April as the 10 year and the 30-year bonds have rallied the most (yields declined the most) in the past month since July of 2013.

Three of the weakest April sectors have been consumer cyclical (retailers), financials (banks), and technology. Plunging bio-techs have also made healthcare one of April’s weakest groups. Those rotations are consistent with a market entering a downside correction. The only caveat is that the Bio-techs have already entered bear market territory after declining 20% since their highs in February of 2014.

Financials Sector SPDR (XLF) continued to decline last week in heavy trading. The XLY lost 4% for the week versus an S&P 500 drop of -2.6%. Most of the losses came in the banking sector which declined nearly 5%. That weaker performance is reflected in a falling XLY – SPX relative strength ratio. Consumer Discretionary SPDR is already threatening its 200-day average. The XLY was pulled lower by autos (-4.9%) and apparel retailers (-5.6%). It’s not a good sign for the market when economically-sensitive sectors are showing relative weakness. Last week’s FOMC meeting minutes made investors believe that the economy is much weaker than previously expected.

The financials are likely to test their 200-day moving average near 20.60. The heavy volume seen last week in the sector is an ominous sign, despite better than expected earnings from Wells Fargo. The ratio between the XLF and the S&P 500 index is poised to test the March lows. This week’s economic data will go a long way toward determining the future movements of the markets in April.

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