Stock Market Rotation to Growth Begins

By: Donald_W_Dony

In early January, the bear market correction ended. In response, money began to flow out of defensive assets such as bonds and the US dollar and move back into growth (Chart 1). By mid-January, equities were now outperforming fixed income for a first time since July.

Consumer staples and utilities were the hardest hit over the past month as these two defensive industries were sold off. These two sectors usually outperform during a bear market and underperform in a rising market.

Financials posted the greatest relative gain against the S&P 500 over the last 30 days. This expected move from this leading sector was followed by materials and industries. Two groups that typically display higher relative performance early in a new rising market. Technology and transportation also were good performers last month as traders continued to pull money away from safety sectors and move them over to risk.

The rapidly declining VIX added evidence that this run from the S&P 500 was not a bull trap. The Volatility Index (Chart 2) has dropped from the moderate risk level of 30 in December to a low risk of 18.28 in mid-January.

Bottom line: The standard sector rotation that develops in a new bull advance is occurring. Positions in defensive assets such as bonds, consumer staples, utilities and the US dollar are reduced. Financials typically lead followed by materials, consumer discretionaries, transportation and industrials.

Technical models suggest that the rally should continue into Q1. The next expected low is in late April.

More research about the rebounding markets and the present sector rotation will be in the upcoming February newsletter.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2012 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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