Several sources ($) this weekend pointed out the strong defensive rotation into the healthcare, utilities and consumer staples sectors. Which is ironic because the best performing sectors in the past week were the semiconductors and technology stocks.
Barron’s mentioned the relative attractiveness of defensive healthcare stocks several times in this weeks edition, from the front cover lauding United Health (which has been an amazing stock) to The Trader pointing out Tenet Healthcare as an interesting long (which I agree with). However, I think the "Sector Rotation" article summed up the consensus thinking very well. Its conclusion was that health care remains attractive, and utilities, while expensive, should continue to outperform. In addition, telecom remains interesting but it’s time to take profits in energy, and steer clear of tech.
Jason Goebfort at the sentimentrader.com points out that this sector rotation has already played out. According Goepfort’s Rydex Sector analysis, "As of Friday, the most defensive sectors that Rydex offers have received 39% of total assets in all the sector funds. This is very nearly a new record…On the other hand, look at those poor high-beta funds. On Tuesday, those funds had garnered only 7% of total sector assets, a new record low….The spread between the amount of assets the defensive sectors have been getting and the amount the aggressive sectors have been getting has never been wider in the past 5 years. "
This defensive sector rotation has been going on for a while already but has been gaining steam since the end of the first quarter. Energy has been underperforming and the money has been flowing into healthcare and utilities.
The interesting part of this rotation is that it could already be coming to an end. Technology outperformed last week and utilities underperformed.
The NDX point and figure chart broke above it’s 45 degree downtrend line.
However, I don’t think this is a sustainable trend just yet. The reason is that the market is still very shaky. While the NASDAQ outperformed, which is a positive, the NYSE broke down once again. Markets perform best when the NASDAQ leads the broader market higher but you also need the broader market to act better than it did last week.
And the NYSE was acting terribly last week. NYSE breadth rolled over…
and price has broken down as well.
But from a contrarian perspective, I think traders should be looking to buy pullbacks technology stocks that pull back to support and sell rallies in defensive sectors that rally into resistance.