Wednesday, August 30, 2006

Sector Rotation - Good or Bad?

Some items worth following

  • Douglas McIntyre wonders on the 24/7 Wall Street blog whether the high-water mark in oil-company profits has been reached. "Oil dropped again today on word that crude supplies rose 2.4 million barrels for the week ending August 25. Probably less than one in ten analysts will lay even money that prices will continue to decline. But the same might have been said about [oil's price] increase if you look back far enough," he writes.

  • Steven Vita, who writes the Alchemy of Trading blog, muses on the current rotation in the market. "[A] very important subject [is] in front of us as we watch the Energy/Metals/Materials trade losing steam…apparently in the final death-twitching before being rolled onto the embalmer's work bench," he writes. "Somehow we have to figure out what is going on here because if they finally do go and die for good, there is going to be a great migration of capital looking for a new home, and that's what the Street people have come to call 'sector rotation,' and all new bull markets start with one of those things."

Among the strong performing indexes since the broader market hit a rough patch around May 10 are the NYSE Health Care Index (up 6%), the Morgan Stanley Consumer Index (up 3.8%), the Amex Tobacco index, up 7.6%, and the Dow Jones Utility Average (up 8.2%), while growth areas have lagged. The Morgan Stanley Cyclical Index is down 10.5% in that period, the Philadelphia Semiconductor Index is off 12.1%, the Philadelphia Housing Index has lost 20%, and the Russell 2000 is down 7.8%.
To some, this is a warning. "Often, it's the last gasp of the bull market when investors reach down to these groups that aren't really growing very fast, but still seem to be more attractive than the rest of the market," said Kenneth Tower, market strategist at
So we have Steven Vita musing that sector rotation will cause a bull market and Kenneth Tower saying it is the last gasp of the bull market!

I’ve been running through some of the numbers and it looks like the sector movement is just about right for this time in the market. Jump over to check out the sector analyzer (and start the java applet), and you’ll see that things are right on track for the time when sectors rotate into Staples, Services, and then Utilities as the market declines. I keep an eye on this for you and the last few picks all kept this in mind, worry not.

Invest Well,

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