ETFsector.com Elev8 Sector Portfolio Allocation Update, July 17, 2024
High-Beta Cyclicals Taking Over Leadership
We are seeing a clear move towards economic cyclicals (XLY, XLF, XLI, XLB) in the near-term as a combination of dovish rate expectations and favorable earnings releases boost optimism. That move is being funded by selling longer-term winners XLC and XLK. As we detailed in our weekly market letter, XLC was close to triggering a rebalance signal in our Elev8 Sector Allocation Model. The cadence of earnings and the improving technical condition of cyclical sectors has us taking our XLC position from Overweight to Neutral. We are also trimming our XLK long as it has made a relative “lower-low” in the near-term driven by the Semiconductor Industry. Our positions, before and after rebalancing are below.
Elev8 Model Portfolio Rebalance
Elev8 Model Signal Review
We are seeing our relative strength signals triggered in favor of cyclical sectors XLF, XLI, XLY and XLRE triggered by MTD rotation. We follow our zero-weight sector discipline through month end but re-allocate amongst the universe of long sectors in the portfolio. This methodology, along with an initial move to neutral weighting intra-month, is designed with the understanding that our sell signals are often triggered at near-term oversold levels, and there is often some mean reversion after the signal.
Looking at the Sector Relative Strength Chart below, we can see the combination of earnings releases, bets on dovish Fed Policy and selling in Mega Cap. leadership have tipped off a powerful rotation. Our rebalance looks to leverage momentum in the new bullish reversals.
- Panel 1: SPY, 1yr, daily
- Panel 2: XLK and XLC are making new Relative-Lows vs. SPY
- Panel 3: XLF and XLI are making multi-month Relative-Highs vs. SPY
- Panel 4: XLRE is making multi-month Relative-Highs vs. SPY
- Panel 5: XLY is making multi-month Relative-Highs vs. SPY
Looking at the same chart over a 5yr period shows there is considerable ramp for rotation if longer-term trends are indeed changing. We will cover some of our long exposure in the Mega Cap. leadership theme for now and see what the rest of earnings season will bring.
- Panel 1: SPY, 5yr, weekly
- Panel 2: XLK has outperformed the S&P 500 by +48% over 5 years
- Panel 3: XLF and XLI have lagged -19% and -13% respectively
- Panel 4: XLRE has lagged by -41% over 5 years
- Panel 5: XLY has lagged by -16%
Sources: Bloomberg
