Risk On Rotation

We had no changes to our Large Cap Portfolio this week. For an exercise, see if you can notice the broad market change by examining our current holdings' behavior this week:

Offensive Groups (Consumer, Materials, Industrials) 

DIS

SBUX

TWX

IP

PPG

BA

HON

Defensive Groups (Utilities, Bonds, Healthcare)

PCG

TLT

UNH

BMY

Can you identify what happened this week? It appears clear to me that the defensive groups experienced relative weakness and pullbacks, while the offensive groups acted strongly.

I also notice how the offensive groups are either just emerging from or are in the later stages of consolidation bases. Contrast that with the defensive names that are well extended from any previous support bases.

We could be seeing a rotation underway from the defensive names to the more risky and economically sensitive names. Continued rotation has been the story of this bull market and this could be the next chapter.

The defining characteristic of this week's market was the selling of interest rate sensitive and defensive investments . Friday's positive Jobs Report paved the way for a movement away from safety assets and back toward more economically sensitive groups.

 The leaders of the past couple years took a beating this week lead by Utilities, Treasury Bonds and Health Care. While Consumer stocks are looking quite strong and could provide fuel for another wave to this bull market. 

Speaking of fuel, Energy saw a strong bounce as oil's relentless skid got some relief this week. But don't make anything more of it than what it is. The oil bounce was simply a pause in a severely downtrending market. Many are trying to call a bottom here (as they have been for a couple months now) but that is a sucker's game where you will just end up throwing money down a hole. You don't have to be the first one in to make money. The much higher probability is just to remain patient and wait for a new uptrend to begin to establish itself. One week's reprieve doesn't change a multi month crash. Just be patient.

The move that was most notable to me this week was the Utility sector pulling back after last week's reversal candle. It is still a short term signal, so no long term action is necessary. It appears the group is seeing some overdue profit taking. When a stock or sector has been trending as strongly as Utilities have, you will see exaggerated selling as those looking for a quick trade don't want lose their profits. But those with the intention of trading the long term trend must be willing to give back modest initial gains to stick with the secular bull market in the making.

Always try to keep one week's action in perspective. Here are the Monthly charts of two Utility stocks I own:

 While this week's action was heavy, the longer-term view is very bullish. In both cases these stocks are emerging from massive base consolidations (PCG 15 years, AEP 20 years) where the stock price went essentially nowhere for more than a decade. By my indications this group is still looking to move significantly higher over time and is one of the most positive looking Sectors for multi-year strength.

I posted about a year ago that Utilities had bases breaking out all over the place. We can see that this group is just getting started:

You can basically throw a dart at any name in this group and find a stock breaking to multi-year highs after multiple years, sometimes decades of base building. As they say "the bigger the base, the higher the move in space". Hard to beat bases like the Utilities have formed over the years.

Follow me on Stocktwits for updated charts and notes throughout the week @RelativePerformer.