Sector Rotation Says Bearish

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Millionaire Now! by Larry Nusbaum

This blog is based on the organizational principles found in my new book, "Millionaire Now! - A Financial Toolbox with Seven Steps to Wealth".

Sector Rotation Says Bearish

Posted on 07/07/2008 23:57:38 | Link | Post Comment

SECTOR ROTATION MODEL... One of John Murphy's readers asked him where we are in the Sector Rotation Model. That model shows the normal sector rotation that takes place at various stages in the business cycle. The chart shows that basic materials and energy are market leaders at a market peak. As the economy starts to slow, money starts to rotate out of those two inflation-sensitive groups. Basic materials peak first and energy last. This week's downturn in basic material stocks suggests that the topping process is moving even further along. Energy may be the next to roll over. As the economy slows, money flows into consumer staples, healthcare services, and utilities. That's where we appear to be right now. One way we can tell that a bottom is near is when money starts to flow into financial and consumer discretionary stocks. So far, there's no sign of that happening. That leaves us in the midst of a bear market with money flowing toward staples, healthcare, and utilities.

STOCKS LEAD THE ECONOMY... Everytime he show the Sector Rotation Model, he "feels the need to point out that the stock market (red line) peaks well before the economy (green line)." Although most of us are aware that the stock market is a leading indicator of the economy, that point keeps getting lost on Wall Street and the media. Ever since the market peaked last fall, the media has presented a parade of economists arguing that the economy was still on sound footing. I remember seeing a headline "fear versus fundamentals" back in January (that was repeated again this week on CNBC). The implication being that the market was falling on "fear" instead of "fundamentals". With the stock market having had one of the worst first halfs in decades, we're now starting to get confirmation that the economy is in bad shape. It's a little late for that to do anybody any good. That's why we study the market and pretty much ignore the media, economists, and Wall Street suits.

From Gary Kaltbaum:

"This leaves the market with literally no leadership. I do recognize that BIOTECHS and some MEDICAL areas have been acting better. But I promise you one thing, these areas are not going to lead the market out of oblivion. The one area that is showing good technical attributes is GOLD, and that is not bullish for the market.

Lastly, as you know, I have been out front of all the problems we are now seeing and experiencing. I was hoping upon hope that the market would right itself to tell me the economy would somehow hold up. As someone who believes the market is smarter than everyone, this is not a good thing to see the market crumble like this and to especially see so many consumer areas literally melt down.

And now to make matters worse, commodity stocks have now topped badly. This action means that our economy is in dire straits, and not getting better. I don't need to tell you where General Motors and Ford are now trading, and I certainly don't need to tell you about the Financials. I am in hopes you have been listening and letting this market pass as you sit in cash. I have been in cash for weeks...and thankfully so.

There are just simply times where it doesn't pay to play."

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