Defensive sector rotation since the August low

Since 25 August, the S&P 500 Index has rallied 8.9%. There has been a sector rotation away from cyclical stocks towards staples stocks, a negative development for market indices.

In June, I showed the momentum divergence on the outperformance of the iShares Consumer Services (IYC) against the S&P 500 Index.

IYC vs. SPX weekly

• Another divergence of second degree has formed and so far, the monthly RSI is back below 70
• The MACD divergence remains in place (just)

IYC vs. SPX weekly

There was weekly RSI and MACD divergence at the high

IYC vs. SPX daily

• There was a daily RSI divergence below 70 at the high, following a divergence above 70 in early August
• Only this last high matches my RSI divergence criteria, set out on the My methods page
• The relative peaked on 23 September, whilst the S&P 500 made a low on 28 September. The relative has declined during a rising market

Comparison with iShares Consumer Goods (IYK)

IYK is a more defensive ETF than IYC, being heavy on consumer staples stocks whereas IYC has more discretionary stocks.

IYK versus IYC

• IYK has rallied 10.8% since 25 August, outperforming the S&P 500 Index, so the rally has been led by defensive stocks
• The ratio made a spike high on 24 August, coinciding with the sharp index decline
• The ratio has a track record of peaking a few months before the end of bear markets (August 2002 and November 2008)
• The ratio has broken above the base and is above the 24 August peak

Conclusions

• The trend of outperformance by IYC is over and this is a bearish development for the market indices
• Funds should be overweight consumer staples stocks from IYK in the medium term