Sector Rotation Model Explained

The chart above depicts the graphical relationship of the Economic and Stock Market Cycles based upon Sam Stovall's theoretical model of Sector Rotation. It's generally accepted the stock market leads the economy by 6 - 9 months. In other words, it "discounts" future economic activity. More specifically, certain sectors tend to be outperformers on a relative basis while others are laggards. The Sector Rotation Model gives investors a template upon which to identify what point in the "cycle" the economy and stock market are and which sectors are most likely to attract investor funds.

The green arrow represents the economy and red arrow the stock market. The sectors that comprise the SP500 are overlapped above in a very specific order. Currently the economy is considered to be in FULL RECESSION and MARKET BOTTOM (potentially). If that assumption holds true, then the Sectors that should see relative strength at this point in the cycle are TECHNOLOGY, FINANCIALS, CYCLICALS and BASIC MATERIALS. The laggards should be CONSUMER STAPLES, UTILITIES, HEALTHCARE and ENERGY.

If you examine the previous posting labeled Sector Performance you will notice that those specific Sectors that are modeled to be outperformers at this point in the cycle are indeed leaders as the Market is attempting a bottoming process.

It is important for the trader to keep close watch on the performance of these various sectors going forward as they will in effect give us the "temperature" of the markets and the economy's future.

Industry Group Performance

Our previous post below took a look at the nine sectors and their relative performance versus the benchmark SP500 index. The chart above breaks down those sectors to Industry Groups in order to closely examine where the strength and weakness is concentrated. We noted that Consumer Discretionary Sector was an outperformer since the March lows...A closer look details that Retailers and Homebuilders have indeed been strong relative performers along with Banks. These three groups have been the weakest since the August 2007 highs, so it's not surprising that they are the first to show strength at this point in the cycle. Technology was highlighted to be an area to consider placing new investment funds. Internet and Semiconductor Groups are also showing relative strength, so it's not surprising that Nasdaq Composite has been a leader since it represents the main core of the Technology Sector.

As stated in previous post that the trader would be well served keeping close watch not only on the broader sectors but also on specific industries within the SP500 index.

S & P 500 Sector Performance

The above chart displays the Nine Sectors that comprise the S&P 500 Index and their relative performance versus the SP500 benchmark. The Bears have maintained that the current rally from the March lows is nothing more than a typical "bear market rally", while the Bulls have been quietly optimistic given the damage that has been done. A closer examination of the sectors provides the objective trader a realistic view (not subjective) of the underlying strength and weakness in the SP500.

"Not All Sectors are Made Equal". Typically at market bottoms the sectors that should lead on a relative basis are Financials, Consumer Discretionary, Technology, Industrials and Basic Materials. As you can see from the chart above those are exactly the areas that have exhibited the strongest relative strength during the current rally. The more defensive sectors such as Healthcare, Utilities, Energy, and Consumer Staples should be laggards. Again, this is the case.

So, the jury is out whether this rally is nothing more that a "bear market rally" or the beginning of a new Bull Market. It is important to the trader to keep close watch on these nine sectors when price action does pullback and the current rally ends, as that will be a tell-tale sign regarding the bull/bear outcome.

TPP Balance Chart

Friday (4.24.09) had all the makings of "Fed Day". Overall trade was quiet yet progressively positive as traders anxiously awaited the details from Fed regarding the banking system's "stress-test" methodology. It was "buy the anticipation, sell the announcement", followed by "buy the drop and sell the pop" type action. Program trading kicked in as price moved from fair-value to extreme discount up to extreme premium. In the end, the S&P closed near its high for the session.

Though we admit this type of volatility can be challenging to trade, we at Trade Pilot Pro (TPP) follow a disciplined approach to trading. The above chart is our core Balance Chart which provides the trader with all the critical levels needed to make intelligent knowledgable trade decisions. The sub-graph labeled TPP Cycle Trend is our proprietary buy and sell filter. As you can see on the chart the Cycle Trend accurately identified profitable trade opportunities without getting whipsawed by the algorithmic programs.

THINK!

I am your constant companion. I am your greatest helper or your heaviest burden. I will push you onward or drag you down to failure. I am completely at your command. Half the things you do, you might just as well turn over to me, and I will be able to do them quickly and correctly. I am easily managed; you must merely be firm with me. Show me exactly how you want something done, and after a few lessons I will do it automatically. I am the servant of all great men. And, alas, of all failures as well. Those who are great, I have made great. I am not a machine, though I work with all the precision of a machine. Plus, the intelligence of man. You may run me for profit, or run me for ruin; it makes no difference to me. Take me, train me, be firm with me and I will put the world at your feet. Be easy with me, and I will destroy you. Who am I?

I am a *HABIT* !!!

Catching Bottoms and Tops

Ok, ill let you in on a really big trade set-up I use

READY

Look at where the market was and look at where it is going, you can not break this rule under any circumstance!

Ok now that you did that.

Place a trade in the direction that it is going, this is where it gets hard, it is kind of like seeing the “forest through the trees”

After you place the trade, now I mean only after do you start to make money, this is where it get’s even harder to do.

You see we all want to be right and prove the market wrong, and say I got the bottom tick and this is a very scary thing to do
But we will risk everything to do it so we can justify our hard work and time we spent studying the markets and if you do actually get the bottom tick, it will be nothing more than (POSITIVE RE-ENFORCEMENT OF DESTRUCTIVE BEHAVIOR)

DON’T WORRY YOUR NOT ALONE.

The sad part of this is that it is a terminal disease traders never recover from, trying to catch a top or bottom in any market or stock will ultimately end up in ruin for all traders,
please understand THIS IS A LOSERS GAME, in fact it has nothing to do with trading at all it has do with our Lack of self worth and our own perception of how we judge ourselves, we want to be right more than we want to make money.

So when you are trying to call market tops or bottoms take a moment of pause to “THINK” why am I doing this, is it to make money ? or prove something to myself or someone else.

Trading Bias: Is it worth it?

What does a having a Bias do for trading anywayHaving a bias is the tendency to give greater weighting to information that supports our own theories and beliefs, while minimizing disconfirming information. People have a natural tendency to filter information in a way that favors their preferred views, we see what we want to see, we hear what we want to hear, in short form we will only look for the opinions from those that our like our own, we then make it a self fulfilling opinion, and if we are wrong we can blame the other party for there miss-calculation or we can release ourselves from taking responsibility, a destructive pattern that traders do almost 100% of the time

How do we break this pattern?

Stop listening to so called experts, who for the most part don’t even trade and we ourselves spend more time analyzing the markets then they do, we have our money at risk, why would we follow the opinions of others, do we know they have there money at risk, NEVER have we seen there accounts, NOR do we know them personally, NOR do they care if we loose money, NOW Makes you wonder why?

Losing traders have these biases.

TPP Cycle Trend ES 15 min

The above chart shows the TPP Cycle Trend buy and sell signals on the 15 min chart of the ES. Support is at 823.25 pivot. The current structure is a symmetrical AB=CD pattern. You can also see the Wave AB is defined by a smaller degree symmetrical ab=cd pattern. The symmetry has been near perfect with cycle buys and sells firing at the pivots.