Watch sector rotation when portfolio planning

Hero today, Zero tomorrow. That’s how ValueTrend portfolio manager Keith Richards reminds himself that sector rotation is becoming faster and more pronounced of late. So who’s hot, and who’s not? Keith sees consumer goods stocks as a sector that’s a Zero about to turn Hero. Healthcare stocks are still a zero . . . but keep an eye on them.

healthcare_stocksOver the past few years I’ve referred to the market as a ‘stealth’ market. That is, one that sees money rotate from winning stocks into depressed stocks, and vice versa. Rotation from sector to sector is also becoming faster and more pronounced of late. It is for this reason that I believe in truly active management of your portfolio—whether you do it for yourself, or you hire an active (i.e. NOT buy and hold!) manager to do it for you. I’ve created a little mantra that may help you remember to rotate sectors in markets as we move forward:

Today’s hero becomes tomorrow’s zero

I’d like to suggest that there is a high potential for continued rotation from the current favorites (heroes) of U.S. technology, industrials and financial stocks into other sectors.  For the past while, those sectors have been the places to be. Interestingly, financial stocks on both sides of the border have already begun to underperform. Time doesn’t stand still, and money never sleeps. I’ll be watching for signs of a change in trend and money flow into the currently flat or losing sectors and stocks (the zeros).

I’d like to highlight the past three years of rotation in one-year increments from May to May. I could have easily gone back further to illustrate my point, but three years of data will give you the general idea. I’ve used the ‘PerfCharts’ of S&P Sector ETFs to show performance of the 9 major S&P sectors.

A brief history of time, space, and sector rotation

May 2014 to May 2015

As you will see on this chart, the leading sectors in that time period were Healthcare stocks (up almost 18 per cent) and Cyclicals (up eight per cent). The under-performers were Energy (down 25 per cent) and Industrials (down 4.5 per cent). Materials were down 4 per cent as well.

May 2015 to May 2016

Very different than the 2014 to 2015 period, Consumer Staples stocks (up 12 per cent) and Utilities (up 15 per cent) lead the charge in this rotation. Cyclicals continued to do well (up 5.7 per cent) while Materials were down another 4.7 per cent. Energy repeated its lousy performance with another horrid loss of 11.7 per cent. Of interest was the abrupt reversal of Healthcare stocks from top dog in the prior period to a 2.6 per cent loss over this 12-month period. I’d also like you to take note that in this period, Technology stocks (up 4 per cent), Industrials (up 2.8 per cent) and Financial stocks (down 0.8 per cent) were relatively uninspired performers over this 12-month period.

May 2016 to May 2017

What a difference a year makes. In this rotation, we saw Technology (up 16.6 per cent), Financials (up 10 per cent) and Industrials (up 7.3 per cent) as the movers and shakers. Remember how Healthcare was the best place to be just 2 years prior, and Staples and Utilities were the leading sectors in the last 12-month period? Well, guess where they are now? Staples is down 7.4 per cent, Utilities is down 2.5 per cent and Healthcare is sucking wind at a 6.6 per cent loss. Yesterday’s hero, once again becoming today’s zero.

Energy . . . yesterday and today’s zero

I believe that oil and energy-related stocks are in the process of basing. They are not ‘buys’ at this time, and may not be for another couple of years. They are merely watch candidates. At this time, oil is trying to put in a bottom. When will it break out? You and I can’t say. It’s much too early to make such a prediction. Time will tell. A break of $62 would indicate a new bullish phase for this commodity and a return to $90. That’s a long way off. But, things change quickly these days. Keep an eye on oil.

Consumer staples . . . a zero that’s becoming a hero

The consumer staples sector in the U.S. contains stalwarts such as Procter and Gamble (NYSE—PG), Philip Morris (NYSE—PM), Coca Cola (NYSE—KO) and Colgate Palmolive (NYSE—CL). In Canada, companies like Loblaw (TSX—L), Alimentation Couche-Tard (TSX—ATD.B) and Metro (TSX—MRU) are considered consumer staples. The chart looks good for SPDR U.S. Staples ETF (NYSEARCA—XLP).  A Canadian exchange traded fund that nicely represents the Canadian stocks is the iShares Consumer Staples ETF (TSX—XSP). As an added bonus, consumer staples stocks are considered seasonally attractive from May to October.

Healthcare stocks . . . still a zero but watch for a breakout

Great healthcare stocks like Johnson and Johnson (NYSE—JNJ), Pfizer (NYSE—PFE), UnitedHealth Group (NYSE—UNH) and Gilead Sciences (NASDAQ—GILD) are represented in this group. Better to play the U.S. side if you enter this sector, as the Canadian side is just too small. The benchmark ETF SPDR Healthcare (NYSEARCA—XLV) has been pretty flat since 2014. But a breakout through $76 per share might indicate a rotation back into that sector. Keep an eye on this one—it’s pretty close to that price as I write this article.

Keith Richards, Portfolio Manager, can be contacted at He may hold positions in the securities mentioned. Worldsource Securities Inc., sponsoring investment dealer of Keith Richards and member of the Canadian Investor Protection Fund and of the Investment Industry Regulatory Organization of Canada. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only and not necessarily those of Worldsource Securities Inc. It may also contain projections or other “forward-looking statements.” There is significant risk that forward-looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.

This is an edited version of an article that was originally published for subscribers in the June 2017/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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