S&P 500: Classic, Late-Cycle Rotation Into Deep Cyclicals
Cam Hui | Aug 19, 2013 02:55AM ET
Years ago, one of the first things that I learned when I ventured into technical analysis was sector and industry rotation. Technical (which are not necessarily economic) bull phases start with leadership from interest sensitive groups, such as banks and homebuilders. The leadership baton is then passed to consumer related sectors, capital goods and so on. The terminal phase is signaled by the leadership of deep cyclical resource sectors.
I believe that's what we are witnessing now.
First of all, there is little question that the leadership of homebuilding stocks is rolling over. The chart below shows the market relative returns of the homebuilding ETF (XHB), which is in a relative downtrend after breaking key relative technical support levels.
Meanwhile at the other end of the spectrum, we have seen a divergence between equities and commodity and commodity related plays. The chart below shows the S&P 500 Index (SPX) (in black) and the CRB Index (in red) for the last three years. For the first couple of years, the two more or less moved in tandem, but a divergence was much in evidence in 2013 as stocks went north and commodities went south, mostly because of angst over China.
In the last week or two, the data out of China has been more positive (though not everyone believes the official statistics) and commodity prices appear to have bottomed and they are starting to rally. Meanwhile, the equity uptrend remains intact. These are the classic signs of a late cycle rotation into deep cyclical sectors of the market.
A crowded short in commodities and EM
Commodity related plays have become unloved and sentiment has moved into a crowded short reading. These charts from David Rosenberg of the large speculator position from the Commitment of Traders report on copper tell the story:
Large speculators (read: hedge funds) are also in a crowded short on the China and commodity sensitive Australian dollar:
The latest BoAML fund manager survey shows that the most unloved sectors are resources and emerging markets (via Qwest Investment Fund Management Ltd . (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.
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