As British rate expectations parted ways with central bank guidance, short-dated U.K. government bond yields began to rise more quickly than longer-dated ones.Getty Images/iStockphoto
Strategists are still fixated on market rotation, as investors sell the leaders and buy the laggards. Here's why: It tends to signal strong market gains ahead.
"Investors have chosen to take profits and invest in laggards," said strategists at Pavilion Global Markets, in a note. "Our historical analysis shows that these de-risk/re-risk periods are usually followed by strong gains in equities."
This observation follows what looks like a sideways move by the S&P 500 over the past seven weeks. Since the end of February, the benchmark index has risen just 1 per cent, after a total of eight days in which the index rose or fell by 1 per cent or more.
But beneath the surface, a lot more has been going on. Energy stocks, utilities, consumer staples and telecom stocks each have risen by 3 per cent or more. At the same time, tech stocks, health-care stocks and consumer discretionary stocks have fallen.
What's particularly interesting here is that the move marks a 180-degree shift from market action over the previous 12 months. From Feb. 2013 to Feb. 2014, health-care, consumer discretionary and technology led the market, while telecom, utilities and staples lagged. (In Canada, a clear rotation is far harder to see, possibly because the S&P/TSX has been on a tear since last summer and is now just 3 per cent shy of a record high.)
The Pavilion strategists have another way of looking at the shift in the S&P 500 – the number of stocks trading above their 50-day moving averages. At the end of February, 83 per cent of health-care stocks and 75 per cent of consumer discretionary stocks were trading above the technical level; the number has since fallen to just 28 per cent and 35 per cent, respectively. Telecom and utilities have moved in the other direction, with more trading above their respective 50-day moving averages.
Just as the shift is noteworthy, so too is the size of the shift when measured by the median absolute variation, or the change in the percentage of stocks above their 50-day moving average. It is at 21.7 percentage points right now, a large move that has been seen only six times previously since 2003. The strategists call these events "high variability periods" and they tend to be good for the market's overall direction. The average gain after three months is 4.5 per cent, rising to 12.3 per cent after a year.
But be careful about piling into the new market leaders in the hope that the trend will continue: Within six months, most of the new leaders failed to outperform.
David Berman