Sector Rotation Two Weeks Study Q2 2021

Quarter 2 of 2021 is underway and it’s time for another Sector Rotation Two Weeks Study. In general, I’m getting mixed messages from the data with no real solid grasp on what sectors might benefit from capital inflow this quarter. As projected in our Q1 study, Energy did outperform for much of the 1st quarter but that changed drastically in the 1st two weeks of Q2 where it is now underperforming by -7.92%. Energy outperformance suggests we are in a market top phase of the cycle and that seemed to make sense last quarter but the sudden change for Q2 is difficult to make out. Now Consumer Discretionary appears to be outperforming the most by a modest +2%. Interestingly enough, Consumer Discretionary suggests a market bottoming phase of the cycle, hence the mixed messages from last quarter to date. Did money managers get sucked into the euphoria and are no longer positioning themselves for a market cycle top? Who knows for sure but either way this flip flopping of where we’re at in the cycle is interesting. 

If anything, I think these mixed messages aren’t a surprise considering where we are in this euphoric up only market. The S&P put on about a 7.5% gain in Q1 2021 but now for Q2 it’s already up 5.56% in just the first two weeks of the quarter. This year is turning out to be a wild ride and as long as the money printers keep printing and the stimmy keeps stimming, should we really be expecting the market to roll over? Without a doubt we’ve gotten a little overextended and a healthy pullback could come at any time but that could very well be a buy the dip moment. After all, if the correction is deep enough we should be expecting the Fed to come in with a bazooka to keep the market propped up. 

Here’s how the Q2 1st Two Weeks Study breaks down by sector:

XLY Consumer Discretionary +2.05%
XLC Communication Services -1.09%
XLK Technology +1.65% 
XLI Industrials -1.73%
XLB Materials -0.13%
XLE Energy -7.92%
XLP Staples -1.43%
XLV Healthcare +0.25%
XLU Utilities +0.93%
XLF Financials -1.42%
XLRE Real Estate -0.93%

Q2 2021 1st two weeks sector rotation study

Aside from the big change in Energy, Comm. Services, Financials and Real Estate came off a bit while Consumer Discretionary, Technology and Utilities all enjoyed slight bumps into outperformance. The energy long trade has been working since last November and it started losing steam a few weeks ago. We’re now seeing that unwinding reflected in sector rotation as money managers appear to be moving away from energy. That said, when scrolling through the Sector ETFs, most of them are in the midst of well established up trends and continually making new highs while the energy ETF XLE is in the process of testing a monthly W breakout level. Looking at the charts I think that energy is still the most buyable in terms of location. Perhaps Energy’s underperformance over the last two weeks is more about consolidation after a big rally and once it plays out we could see new moves to the upside. Consumer Discretionary does seem to be drawing capital inflow but not in an overly pronounced way and at the moment I’m not seeing any action to take in that sector.

Overall the mixed messages I’m getting from this study aren’t giving me any confirmation of where we are at in the cycle, and which sector money is likely to flow towards. Regardless, I think it’s clear that we are very late in a tremendous rally that began a year ago and the euphoria that has set in makes this analysis difficult to pull any actionable data from. Everything is just going to keep going up right? I feel like that’s what most people are thinking right now and while that in itself is a dangerous signal, I think there’s still plenty of gas in the tank to keep this insanity going for the time being. If you’re long then congratulations and may you ride this to the moon, otherwise I would exercise extreme caution when considering new positions. We’ll take a look at this study again at the end of the quarter and see how the dust settled. 



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