RoboStreet – October 17, 2019
Current Sector Rotation Bullish for New Highs
In recent weeks, there has been a notable capital rotation into certain sectors that would imply the economic expansion will continue and that the bull market will enjoy an elongated run to more new highs. It wasn’t only six weeks ago that investors were coming out of a very rough month of August where the only sectors working were bonds, REITs, utilities, consumer staples, and gold. Investors were hunkered down in the bunker stocks with talk of the recession driving narrative.
Soft factory data here at home, the risk of a hard Brexit, the tape bombs being lobbed from both the U.S. and China leading up to the trade talks, the impeachment inquiry and rising tension in the Mid-East were all negative developments converging that had a deep impact on market sentiment. The weight of these fluid situations pushed the S&P back down to test its August lows the first week of October to trade within just a few points of its rising 200-day moving average – and then things changed.
Against this backdrop of dark clouds gathering, the narrative switched to that of the Fed will have to cut rates at the October 29-30 FOMC meeting, China was sending its largest trade contingent, a breakthrough in the Brexit stalemate was making news and the House Speaker Nancy Pelosi decided not to hold an impeachment vote for the time being. It’s as if the geo-political skies had cleared, at least temporarily, which was all the market needed to right itself.
But the gamechanger for the renewed uptick for the market was the onset of third-quarter earnings season and the upside surprises from the money center banks that caught a lot of investors off guard. The financial sector is under-owned and shrouded in negative sentiment due to the slim net interest margin (NIM) generated due to the flat yield curve. However, lending to consumers and businesses is robust, resulting in better-than-expected profits that put a solid bid under the sector.
Semiconductor stocks have also been a big leader since August. Being a highly cyclical and seasonal sector, trading trends in chip and chip equipment stocks tend to be a leading economic indicator from a historical basis. Most of the new technologies coming of age like 5G, Internet of Things (IoT), artificial intelligence (AI), bid data to the cloud, autonomous driving, robotics, computer vision and remote medical procedures all require next-generation semiconductor technology than is rapidly replacing legacy applications.
The third sector seeing huge inflows is the U.S. home construction sector. Shares of homebuilders, remodeling retailers and suppliers of flooring, plywood, insulation, aggregates, roofing, windows, appliances, hardware, water heaters, and HVAC systems are trading to 52-week highs, and in many cases, all-time highs. The combination of a solid labor market, rising wages, low inventory and super-low mortgage rates are fueling a bull market in both single-family and multi-family construction.
With the financial, semiconductor and home building sectors displaying sector rotation, it should give investors plenty of optimism about the forward direction for the broader stocks market. Information Technology is the largest sector of the market by far and has carried the torch for many years while more to go for sure. But, seeing some fund flows into the banks, asset managers, insurance companies and construction stocks is an encouraging development for the bull trend.
What belies investors when looking at sector breakouts is how to time entry and exit points to capture the full near-term move. Case in point, my proprietary AI platform that I incorporate into stock and ETF selection for our RoboStreet advisory service is essential to identifying the precise buy points and sell points for each trade. Looking at the Seasonal Chart below of the Semiconductor VanEck ETF (SMH), we can see that our three out of four probability readings are indicating “higher” for the next 20, 30 and 50-day periods. Bullish signals such as this and other AI tools I utilized give us great confidence in taking a position in this particular ETF.
Even more useful is when my AI tools tell investors when to get defensive, own fewer positions and profit from adding risk when the market has flashed an internal buy signal at the bottom of a determined trading range. My AI system called the recent bottom when the SPDR S&P 500 ETF (SPY) got down to $285. At that point, we added four positions that are all trading in the green for us and our model portfolio that I personally participate in is long 15 positions.
I invite all those looking for a market-tested and proven system to take me up on my offer to join RoboInvestor today. We are making money for our subscribers 87.9% of the time we put capital at work. That’s a system worth buying into.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
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