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Q1 2021 Sector Rotation Review

In January we talked about Sector Rotation and our First Two Weeks Study. At that time Energy was projected to outperform this quarter as institutions and large funds appeared to be allocating more capital to that sector of the equities market. Six weeks later that holds true as energy has continued to push higher. The Energy sector is now sitting at +23.86% up from the +10.79% reported in the first two weeks. Financials also increased to +8.12% from the +4.57% originally reported. Communication Services, Tech, Healthcare and Utilities have all decreased with Discretionary, Industrials, Materials, Staples and Real Estate remaining flat. 

 

Q1 2021 First Two Weeks

Sector Rotation 2 Weeks Study Qtr 1 2021

 

Q1 2021 Quarter to Date

Q1 Sector Rotation To Date

 

 

Energy Sector ETF (XLE)

Looking at a monthly chart of XLE we get confirmation of energy bullishness with a confirmed close above the W breakout level of $46.88. This monthly W has also occurred in a reload zone between the 61.8 and 78.6 Fibonacci levels. This price structure suggests energy wants to move higher but it’s been moving in a solid uptrend since last October and is probably due for a pullback. At TRI we would consider it chasing to put on a new position at this level and the ideal time to have taken this trade would’ve been Q4 2020.

 

Energy Sector ETF (XLE)

 

 

Other Sector ETFs (XLY, XLC, XLK, XLI, XLB, XLP, XLV, XLU, XLF, XLRE)

Looking across all sector ETF charts it’s clear that Energy is the only one trading at the bottom of the range while everything else is near all time highs. That said, they all continue to be bullish with the first signs of breakdown showing in Utilities (XLU) as it struggles with a potential double top. While the uptrend is still intact for all these sectors, hunting longs is risky considering this rally is getting over extended. 

 

XLU Monthly Chart

 

Conclusion

Our sector rotation study for this quarter seems to be playing out nicely with energy clearly enjoying a rally due to capital inflow. In terms of the business and economic cycle, strong energy suggests that we are near a broader market top and if anything we should consider this before taking action in the stock market as a whole. Price has come a long way since the bottom last March and an incoming pullback shouldn’t be a surprise. That said, we’ve also seen energy continue to outperform since Q4 2020 which is a testament to how long it takes for these market cycles to play out. While energy has been strong, the market as a whole has also been incredibly strong and still not showing signs of complete breakdown. This study is telling us that the writing is on the wall for a market top but we must be careful about becoming bearish too early without confirmation of a reversal.

Read our Sector Rotation from earlier this year.