Speculation of a reversal from all time highs is nothing new, after all the market can do only one of three things; move higher, move lower or consolidate gains in time.
The post election rally has been fueled by potential policy changes in Washington. The new administration has garnered attention and wall street responded. Industrials, materials, transports and financials faired the best. All four have seen consolidation of the gains from November, with financials and industrials holding up the best. Transports and materials have pulled back to a modest 23.6/38.2% Fibonacci zone. This is not pointing to an imminent pull back and unless something changes, it appears we are witnessing sector rotation into XLK and XLV.
Reflect on the healthcare sector, which pulled back in the second half of 2016. Does this look weak now? It certainly does not look weak, in fact, the recent breakout confirms our suspicions. Capital flows are finding their way into healthcare.
XLV shows RSI rising, price above all of the moving averages, MACD transitioning above the zero line, with volume that has begun to catch everyone’s attention.
XLK should be no surprise, as leading technology names (FAANG) took turns capturing headlines last week. So far all I see is sector rotation, to start the new year off right, less we forget the adage, “so goes January, so goes the rest of the year.”
The RRG chart is a useful tool available to Stockcharts members. If you suspect sector rotation, this is the first place to look. As you can readily distinguish, XLF is the strongest, as its height and positioning on the XY axis portrays. XLV, XLY and XLK are transitioning. At this point we will anticipate rotation, unless and until this picture changes in a discernible way.
If financials and industrials fall off a cliff in the next couple of weeks, then we will have a reason to pause. Until that happens, we will follow the breadcrumbs.
The bottom line? I’ve learned over the span of my trading career to step back and analyze the market “data”, when I catch myself exalting my “opinion.” The latter serves no purpose except to cloud my judgement.
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