Sector Trends Reveal Market Strength
Sector relative strength easily shows up the wave strength behind the market. If you can judge what folks are buying you can determine the risk on or off mode of the market.
This sector rotation chart shows the stock market cycle and the economic cycle.
1) Stock market bull cycle favors SPDR sectors: Basic Materials(XLB), Industrials(XLI), Technology(XLK)
2) Stock market bear cycle favors SPDR sectors: Utilities(XLU), Consumer Staples(XLI), Health Care(XLV)
At readtheticker.com we have combined the above into two custom indexes: (1) RTT Product Index (@RTPRD) and (2) RTT Defensive Index (@RTDEF).
To determine the pure risk on or off market we divide @RTPRD by @RTDEF, or risk stocks with defensive stocks, and then review with basic technical analysis. Look out for higher highs, lower lows, divergences, etc.
For example, the SPY (SP500 Etf) sideways pattern during May 2011 was not likely to break out higher as folks brought more defense stocks versus risk stocks, and the SPY low of March 9 2009 was always going to reverse as folks starting to nibble at risk stocks (no new low with the @RTPRD/@RTDEF line).
Knowing if the true risk on or off market is active allows the investor to increase or decrease exposure to the market.