Sector ETF Rotation Points to Risk-On

August 22nd at 12:23pm by John Spence

Technical analysts are concerned about Tuesday’s ugly reversal in the major U.S. indices right at the 2012 highs. However, the recent underperformance of defensive sector ETFs suggests investors are willing to add risk.

“A look at sector rotations yesterday failed to confirm the bearish tone of the afternoon. If the market was reversing the uptrend then a defensive rotation would have been evident,” says Investors Intelligence analyst Tarquin Coe. “That was not the case. It was the defensive areas which underperformed whereas the more offensive areas outperformed.”

For example, Utilities Select Sector SPDR (NYSEArca: XLU) and Consumer Staples Select Sector SPDR (NYSEArca: XLP) have significantly lagged the overall S&P 500 in August. They are two noncyclical, defensive sectors favored when the economy slows.

Meanwhile, riskier sectors such as financials have been holding their own relative to the market.

Investors should keep tabs on ETFs tracking defensive sectors such as utilities because they can provide important clues on overall risk appetite in the market. [Utilities ETFs Can be a Market ‘Tell’]

Chart source: Investors Intelligence

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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