{"id":3334,"date":"2013-10-29T06:10:14","date_gmt":"2013-10-29T10:10:14","guid":{"rendered":"http:\/\/www.morpheustrading.com\/blog\/?p=3334"},"modified":"2013-10-29T15:25:45","modified_gmt":"2013-10-29T19:25:45","slug":"sector-rotation-bull-market","status":"publish","type":"post","link":"https:\/\/morpheustrading.com\/blog\/sector-rotation-bull-market\/","title":{"rendered":"Leading Stocks Cooling Off, But Sector Rotation Keeping Bears Away"},"content":{"rendered":"<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright  wp-image-3346\" alt=\"sector rotation\" src=\"https:\/\/www.morpheustrading.com\/blog\/wp-content\/uploads\/2013\/10\/roation.jpg\" width=\"210\" height=\"140\" title=\"\">We&#8217;ve begun seeing a bit of <em>sector rotation<\/em> lately, with leading stocks and sectors cooling off and formerly lagging industries seeing a bit of buying interest.<\/p>\n<p><a title=\"Sector Rotation Explained\" href=\"https:\/\/www.forbes.com\/sites\/robertlaura\/2013\/05\/29\/sector-rotation-explained\/\" target=\"_blank\" rel=\"noopener\">Institutional sector rotation<\/a> is common in bull markets, and the rotation of funds from one industry to another enables broad-based uptrends to remain intact, even when certain sectors are &#8220;overbought&#8221; (we hate that useless word).<\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_85 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">TABLE OF CONTENTS<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/morpheustrading.com\/blog\/sector-rotation-bull-market\/#The_Technical_Indicator_That_Never_Lies\" >The Technical Indicator That Never Lies<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/morpheustrading.com\/blog\/sector-rotation-bull-market\/#So_Wheres_The_Money_Flowing\" >So, Where&#8217;s The Money Flowing?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/morpheustrading.com\/blog\/sector-rotation-bull-market\/#Overall_Stock_Market_Pulse\" >Overall Stock Market Pulse<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"The_Technical_Indicator_That_Never_Lies\"><\/span>The Technical Indicator That Never Lies<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>How do we know when sector rotation is taking place?<\/p>\n<p>The easiest way to spot it is through observing changes in volume, one of the<em> most reliable and useful technical indicators<\/em> at our disposal.<\/p>\n<p>Since <strong>institutional trading accounts for roughly 80%<\/strong> of the stock market&#8217;s average daily volume, the price action of stocks and ETFs is typically driven by the actions of the &#8220;smart money.&#8221;<\/p>\n<p>Analysis of volume patterns tells us which side of the market banks, mutual funds, hedge funds, and other institutions are on.<\/p>\n<p>If, for example, an equity is under distribution (institutional selling), it will eventually drop.<\/p>\n<p>Conversely, an equity will eventually rise if under accumulation (institutional buying).<\/p>\n<p>For this reason, <strong>volume is considered a\u00a0leading indicator,<\/strong> rather than a lagging one.<\/p>\n<p>This is why our trading system is based on always following the dominant stock market trend (riding on the coattails of institutions).<\/p>\n<h2><span class=\"ez-toc-section\" id=\"So_Wheres_The_Money_Flowing\"><\/span>So, Where&#8217;s The Money Flowing?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Solar energy, one of the leading sectors of the last wave up in the market, is one example of an industry that has recently come under distribution.<\/p>\n<p>This can be seen on the weekly chart of Guggenheim Solar ETF ($TAN), an ETF we recently <a title=\"How We Netted A 44% Gain In $TAN\" href=\"https:\/\/www.morpheustrading.com\/blog\/4-tips-etf-trading\/\" target=\"_blank\">sold for a 44% gain<\/a> in <em>The Wagner Daily<\/em> newsletter:<\/p>\n<p><img decoding=\"async\" alt=\"$TAN sell signal\" src=\"https:\/\/www.morpheustrading.com\/\/~rick\/\/charts\/2013\/131029TAN.png\" title=\"\"><\/p>\n<p>Notice the massive volume spike that accompanied last week&#8217;s 4.6% sell-off at the highs, which has so far led to further selling this week.<\/p>\n<p>That <strong>high volume decline is the biggest clue that this ETF is now in correction mode<\/strong>, and may now need to form a base of consolidation for the next month or more.<\/p>\n<p>Specifically, we expect $TAN to come into support of its 10-week moving average (teal line) before it could be considered a low-risk re-entry on the buy side.<\/p>\n<p>As for sectors seeing an <em>inflow<\/em> of institutional funds, we are seeing improving price action in Financials.<\/p>\n<p>On the weekly chart below, notice that S&amp;P SPDR Bank ETF ($KBE) is now trading at its highest level of the past several weeks:<\/p>\n<p><img decoding=\"async\" alt=\"$KBE reclaim 10-week MA\" src=\"https:\/\/www.morpheustrading.com\/\/~rick\/\/charts\/2013\/131029KBE.png\" title=\"\"><\/p>\n<p>Although the banking sector has been lacking relative strength to the S&amp;P 500, $KBE is staging a bit of a comeback after living below its 10-week MA from late August to early October.<\/p>\n<p>$KBE is back above its 10-week moving average, and the price action moving in a tight, sideways range above the rising 20-day exponential moving average on the daily chart (not shown).<\/p>\n<p>Volume in $KBE has actually been declining over the past several weeks, but that is actually\u00a0<em>bullish<\/em> when an equity is consolidating because it tells us sellers are not stepping in as the bulls take a rest.<\/p>\n<p>However, it will be <strong>important to see the confirmation of higher volume<\/strong> if\/when $KBE breaks out above the highs of its range.<\/p>\n<p>Watch $KBE and financial stocks for continued signs of bullish sector rotation, which may make it possible to buy <a title=\"How To Identify A Cup And Handle Pattern\" href=\"https:\/\/www.morpheustrading.com\/blog\/best-stock-breakouts\/\" target=\"_blank\">a cup and handle breakout in this sector.<\/a><\/p>\n<p>The iShares US Medical Devices ETF ($IHI) is an ETF that has not only been a market leader for many months, but continues to hold near its highs without signs of distribution.<\/p>\n<p>$IHI broke out from its last base three weeks ago, and the price is still trading near its highs (above the 10-day moving average on the daily chart). The weekly chart below shows the strong uptrend:<\/p>\n<p><img decoding=\"async\" alt=\"$IHI breakout \" src=\"https:\/\/www.morpheustrading.com\/\/~rick\/\/charts\/2013\/131029IHI.png\" title=\"\"><\/p>\n<p>Another sector we have our eyes on right now is precious metals, specifically gold and silver ETFs ($GLD and $SLV respectively).<\/p>\n<p>Although gold and silver have been stagnant for quite some time, their weekly charts are now showing the formation of significant &#8220;higher lows.&#8221;<\/p>\n<p>As such, a bullish trend reversal may be shaping up in the coming weeks. As always, we will alert subscribers if $GLD or $SLV become actionable.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Overall_Stock_Market_Pulse\"><\/span>Overall Stock Market Pulse<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>As for the general health of the broad market, individual leadership stocks have begun showing a bit of relative weakness to the broad market averages lately, but mostly remain in good shape.<\/p>\n<p>Since the performance of individual leading growth stocks is <strong>one of the most important indicators of\u00a0<a title=\"Overview Of Our Market Timing System\" href=\"https:\/\/www.morpheustrading.com\/blog\/market-timing\" target=\"_blank\">our market timing system<\/a><\/strong>, we are continuously on alert for any red flags that could hint at a substantial stock market correction.<\/p>\n<p>Nevertheless, unless leading stocks begin breaking down below their 50-day moving averages en masse, we are not concerned about a healthy pullback and normal sector rotation in the market.<\/p>\n<p>By the way, please note that several leading stocks are scheduled to report quarterly earnings within the next few weeks. For example, both $LNKD and $YELP report after today&#8217;s (October 29) close.<\/p>\n<p>The <em>reaction<\/em> to earning reports of leading stocks (NOT the earnings numbers themselves) will tell us a lot about the health of the market.<\/p>\n<p>By the first or second week of November, we should have a pretty good idea as to whether or not persistent bullish momentum will at least carry itself through the end of the year.<\/p>\n<p><em>To be alerted of sudden changes to our market timing model (a rule-based strategy of knowing when and how aggressive to be in the market), and to receive our best nightly stock and ETF picks, <a title=\"The Wagner Daily sign up\" href=\"https:\/\/www.morpheustrading.com\/services\/swing-trade-alerts\" target=\"_blank\"><strong>sign up now<\/strong><\/a> for your 30-day risk-free subscription to our swing trading newsletter.<\/em><\/p>\n<div class=\"cfmonitor\"><center><script type=\"text\/javascript\" src=\"\/\/pagead2.googlesyndication.com\/pagead\/js\/adsbygoogle.js\" async=\"\"><\/script><!-- Footer of content --> <ins class=\"adsbygoogle\" style=\"display: inline-block; width: 300px; height: 250px;\" data-ad-client=\"ca-pub-7565144363001883\" data-ad-slot=\"7002222565\"><\/ins><script type=\"text\/javascript\">\/\/ <![CDATA[\n(adsbygoogle = window.adsbygoogle || []).push({});\n\/\/ ]]><\/script><\/center><\/div>\n","protected":false},"excerpt":{"rendered":"<p>We&#8217;ve begun seeing a bit of sector rotation lately, with leading stocks and sectors cooling off and formerly lagging industries seeing a bit of buying interest. Institutional sector rotation is common in bull markets, and the rotation of funds from one industry to another enables broad-based uptrends to remain intact, even when certain sectors are [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_links_to":"","_links_to_target":""},"categories":[5],"tags":[],"class_list":["post-3334","post","type-post","status-publish","format-standard","hentry","category-stock-picks-analysis"],"_links":{"self":[{"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/posts\/3334","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/comments?post=3334"}],"version-history":[{"count":0,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/posts\/3334\/revisions"}],"wp:attachment":[{"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/media?parent=3334"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/categories?post=3334"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/tags?post=3334"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}