Sector Rotation Turning Defensive

In our prior post we made the case of Nasdaq's relative performance influence versus SP500 and concluded that given Naz's recent weakness the long awaited correction in price may be in the offing. Well, the correction has indeed begun, and initial target expectations are 875.00, with further downside thereafter.

In an earlier post we showed how to objectively judge the quality of the rally by paying close attention to the various sectors exhibiting leadership. In a healthy rally the pro-growth sectors should maintain leadership, such as Consumer Discretionary, Technology, Industrials, Basic Materials while sectors such as Healthcare, Utilities, Consumer Staples which are defensive in nature should be laggards. Since the March lows we showed that in-fact this Sector Rotation Model relationship has remained intact...Until this past week.

The leadership role has totally reversed this past week with economically sensitive sectors selling lower, while defensive sectors taking the leadership role. This combination suggests that there is further downside to go with this correction as big investors continue to sell all rally attempts in order to lock in recent price appreciation. (Click on chart to enlarge)

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