Hey trader,
Last week was a bloodbath for anything tied to growth or tech. A defensive sector rotation is moving at its fastest pace since the first quarter.
Bulls are now walking on the edge of a cliff.
The Nasdaq dropped 4.5% on the week. The Dow went the opposite direction and rallied 0.67%.
When two major indexes split that hard in five trading days, they’re telling you where the big money wants to be. Right now, that money wants safety.
You need to understand this defensive sector rotation before you put another dollar into a growth name. The sector leaderboard shows where capital is hiding and which groups I need to see bounce before the bulls take back control.
There’s also a silver lining buried in all this weakness. The market always shows its worst internals going into a bottom.
Let’s start with what that split between the Dow and the Nasdaq really means.
The Dow Caught a Bid in a Defensive Sector Rotation
The Dow is built on blue-chip stocks, while the Nasdaq leans on growth and tech. A 4.5% drop in one and a gain in the other is textbook defensive sector rotation behavior.
In a defensive sector rotation, investors trade growth potential for safety. They sell companies that need a booming economy and buy the ones that hold up when it slows.
Big money is still coming into the U.S. It’s buying stocks that aren’t likely to go out of business tomorrow.
That alone makes me cautious in the near term. Buyers who reach for the safest names on the board aren’t feeling confident about what comes next.
Put Up, or Shut Up, Bulls
|
Performance Leader |
1-week |
30-day |
YTD |
1-year |
|---|---|---|---|---|
|
Sector |
Consumer Staples (XLP) |
Energy (XLE) |
Energy (XLE) |
Energy (XLE) |
Off the top of my head, I can’t remember the last time consumer staples were the top-performing sector of the week. That’s a classic defensive sector rotation.
Utilities, another defensive sector, led the market the week before.
Think about what consumer staples companies sell. Food, toiletries, and life’s other necessities fill their product lines.
None of it is sexy or exciting. People keep buying it during a slowdown anyway, which is why big money runs there when growth looks shaky.
Energy is running the table on every other timeframe. XLE leads over the past 30 days, year to date, and over the past year.
Energy isn’t a growth trade either. Both the short-term leader and the long-term leader sit outside tech.
Growth has been losing the leadership battle for a while. Last week’s defensive sector rotation simply made it obvious.
The warning signs of a defensive sector rotation have been piling up for weeks. Here’s what I’ve been watching:
- Utilities led the market two weeks ago, and consumer staples took the top spot last week.
- Energy owns the longer timeframes while growth names took the brunt of last week’s selling.
- New setups have been failing to materialize.
- Stocks that were strong have started to weaken.
One of these signals alone wouldn’t worry me much. All four showing up at once tells me the defensive sector rotation is in full swing.
Why the Defensive Sector Rotation Is on the Clock
Here’s the silver lining I mentioned earlier. The worst internal weakness always shows up going into a market bottom.
Failing setups and fading leaders feel terrible in real time. They’re also part of how bottoms get built.
Pullbacks like this one are a normal part of a long-term bull market. They shake out weak hands and reset positioning so the next leg higher has room to run.
The bears have the edge right now. Based on where we sit in the cycle, I expect that edge to be short-lived.
When it fades, the ball lands in the bulls’ court. They’ll need to put up or shut up.
In a tape like this, I stay short with the intention of getting long. I have no interest in chasing defensive names sitting at the top of the leaderboard.
If you’ve been following the Sector Leader Bullseye, you know we need to stay alert for a rebound in any growth sector. That could be tech, communications, or even consumer discretionary.
The first one to bounce will tell us the defensive sector rotation is running out of steam.
Put those three sectors at the top of your watchlist this week. Keep a close eye on the 1-week column of the leaderboard.
The moment a growth sector takes the top spot from staples, the bulls have their opening.
I’ll be running those three groups through my Trinity Terminal to catch the first setups that show up. When they come, I want to be early.
Remember, cooler heads always prevail. By the time panic sets in, it’s already too late.
This too shall pass.
Talk soon,
Gianni Di Poce
