Stock Market Sector Rotation Points to Continued Economic Recovery

By: Donald_W_Dony

Analysts and economists often refer to the strength or weakness in certain key industrial groups as evidence of a recovering or declining economy. During the recovery phase of a typical business cycle, there is usually greater buying emphasis on industry sectors that reflect a more optimistic stance.

Consumers, which represent 2/3rds of the economy, normally begin to feel more confident about their financial position and start purchasing discretionary items. Analysts monitor this key sector during the early recovery period for signs of emerging and prolonged strength in an economy.

Over the past quarter, the top 10 performing industry groups provides a clear picture of a continuing recovery. The consumer is, once again, moving toward cyclicals. This action illustrates that a standard pattern of sector rotation continues to hold firm regardless of fundamental causes.

The best performing industries are:

1) Consumer Electronics..............26.06%
2) Recreation Products.................24.35%
3) Hotels.....................................24.20%
4) Mortgage Finance....................23.98%
5) Recreation Services.................20.36%
6) Electronic Office Equipt.............18.59%
7) Life Insurance..........................18.38%
8) Gambling.................................17.96%
9) Leisure Goods.........................17.62%
10) Airlines..................................16.91%

7-out-of-10 high performing sectors are associated with consumer discretionaries. The Mortgage Finance Index is also a peak performer which highlights renewed confidence in the U.S. housing market.

Bottom line: Positive strength in consumer cyclicals is a normal front runner during the business cycle. This move reinforces the outlook that a standard sector rotation model can be expected in this economic recovery and equity bull market. The next industry groups that typically show strength are transportation, technology, capital goods and basic industry (Chart 2).

Investment approach: As a typical sector rotation pattern appears to be unfolding, this evidence should help reinforce the concept that, though fundamental causes can alter from business cycle to cycle, the affects on industrial group movement in a bull market are normally the same. Investors may wish to look for opportunities in the next two sector groups to emerge; technology and transportation.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2010 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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