The fields tilled by the traders of yore yield much wisdom. One theme that keeps cropping up in the five books that I am currently reading and/or rereading is sectors. From Livermore and Wyckoff to Weinstein and O'Neil, the understanding of sectors and cyclical cycles is repeated through their works, which is to be expected after all since in many regards they are branches from the same root limb.
In order to get a composite of sector rotation to better my understanding I set up some simple metrics and ran 5 scans through TeleChart and screen captured the results. Using Morningstar Industry Groups as the universe I decided to scan the current list using a simple formula of C/C20 and C/C165 which gives the change over a shorter term 20 day cycle and medium term 165 day cycle and ranked these from high to low, taking the top 20. I then modified the formula to scan for the same cycle 100, 200, 400, and 600 days ago (the last being approximately 1 month into the bull run since March 2009).
 |
| 04/21/2009 Sector List (600 Days) |
 |
| 11/20/09 Sector List (400 Days) |
 |
| 01/26/2010 Sector List (200 Days) |
 |
| 03/30/2011 Sector List (100 Days) |
Now that the composite of days 600, 400, 200, and 100 has been completed, questions can be framed around this information. What did Resorts and Casinos jumping to the top of the 20 day list in April 2009 say about the prevalent attitude at the time vs. the market's attitude? How are people getting to the resorts? Cruises? Air planes? Will these sectors come into play? Looking at the image from November 2009 shows not only did Resorts and Casinos have duration and were clearly one of the leading sectors of the bull move, but also Airlines did enter the mix as well. Additionally, in noticing the persistence of Resorts and Casinos over a period of time, are laggards beginning to reap the sector strength benefits as well?
 |
| 08/19/2011 Sector List |
Using this composite during the bull move as a reference to the current list, it can clearly be seen that this list is composed primarily of defensive stocks and there is a story being told here as well. A defensive stock is described by Investopedia as:
The utility industry is an example of defensive stocks because during all phases of the business cycle, people need gas and electricity. Many active investors will invest in defensive stocks if a market downturn is expected. However, if the market is expected to prosper, active investors will often choose stocks with higher betas in an attempt to maximize return.
source: http://www.investopedia.com/terms/d/defensivestock.asp#axzz1Vmmetw7v
This list is unadulterated information and simply states that over a 20 day and 165 day period these sectors have shown greater price appreciation. Regardless of what is being said on television, radio, the internet, semaphore, or smoke signals, the simple fact is this: the price flow is speaking quite clearly and it is chanting: "Defense! Defense! Defense!"
Using this context of defensive positioning and returning to the first image from April 2009, what can be seen during the initial stages of the bull market is a mixture of cyclical and higher beta sectors. Using this as a model, paying attention to which sectors begin to rotate into this list may lead to clues about investor sentiment and money flow and when first adopters begin to get more aggressive as well as lead to clues about where the next leadership may be found. Additionally, learning to ask questions about the data may lead to further insight and undiscovered sectors or germinate some ideas to harvest later.
No comments:
Post a Comment