Earnings Season a Big Winner for Emerging Areas of Strength
Key Takeaways
- Money often rotates into the Industrials and Financials sectors during the fourth quarter.
- These two industry groups within the Industrials and Financials sectors are likely to benefit the most as money rotates out of technology stocks.
- The strength in these industry groups may be just beginning so save these charts to your ChartLists.
Secular bull markets are led mostly by areas of growth, as profits in these companies expand rapidly during periods of strong economic growth. But one hallmark of secular bull markets is rotation. As profits are taken in growth companies during bull markets, money doesn't leave the market. Instead, it rotates into recently underperforming areas.
Seasonal Rotation
Historically, it isn't unusual to see money rotate into more value-oriented areas during Q4. In fact, Industrials (XLI) and Financials (XLF) tend to perform extremely well as year-end approaches. First, let's take a look at this relative seasonal chart for the XLI:
Since the late 1990s, the best month of relative performance for Industrials has been November. This sector has outperformed the S&P 500 ($SPX) in roughly four out of every five Novembers since 1997. December represents the fourth-best month of the year in terms of XLI outperformance. That's a strong 1-2 historical punch over the next several weeks.
Next up is the Financials sector. Check out its monthly relative performance since this secular bull market was confirmed in 2013.
Financials don't have the same track record as Industrials, dating back into the 1990s (mostly because of the financial crisis from 2007–2009), but its bullish track record during Q4 since 2013 is rather obvious.
This is solid historical knowledge to have as we move through Q4 and get ready to enter into November.
Sector Rotation
A lot of money has been rotating as a few of the technology industry groups see big selloffs on both absolute and relative bases.
Keep in mind that the Technology sector ETF, XLK, is far and away the leading sector in terms of market cap representation on the S&P 500. This sector drives stock prices and our two key indices, the S&P 500 and the Nasdaq. So while a selloff in this sector might initially be feared as something horrible, I see a silver lining.
During bear markets, when technology sells off, that money leaves the market. It doesn't rotate. What we've been seeing during this period of technology selling is rotation, for sure. You just need to watch to see where the money is going.
Emerging Strength
There are a number of areas benefiting from the rotation out of technology. Two of them are highlighted below:
Business support services ($DJUSIV)
Here's a reversing head & shoulders breakout that is now overbought for the first time in over two years!
Consumer finance ($DJUSSF)
Once again, we're seeing a bullish pattern confirm as both business support services and consumer finance benefit from all the money that's left technology. I don't expect this to last but, if you're a momentum trader right now, you need to understand where the money is going.
Business support services is an industry group within Industrials. Consumer finance belongs to the Financials sector. Given the historical upcoming strength in both sectors, it's possible that the strength in these two industry groups is just beginning.
Tuesday FREE LiveStream Event
On Tuesday, October 27th, at 5:00pm ET, I'll be hosting a FREE live event on YouTube, "Q3 Earnings Season: Where are the Opportunities—and Where is the Risk?" I'll discuss many of my trading strategies during earnings season, which is my favorite time to trade during the quarter, providing you actionable trading strategies and ideas. If you'd like to attend, simply CLICK HERE to register and save your seat! Even if you cannot attend the event live, you should register in order to receive a copy of the recorded event for you to peruse at your leisure.
Happy trading!
Tom
