I like to look for relative strength in sectors vs the broader market as a method to identify potential rotations. These rotations can last for months, or sometimes years, presenting opportunities along the way.
If you think about how institutions rotate capital allocations, the duration makes sense. Whereas it may only take us as a retail investor or trader seconds or minutes to liquidate positions or shift allocations of capital, it can instead take large funds a much longer time due to the sheer sizing of their existing positions and desired sizing of new positions. As a result, rotational flows can last for some time.
Here are three sectors I have my eyes on based on the relative strength they are showing vs the broader market over the prior three months.
The healthcare sector (XLV) has shown impressive resilience, rebounding vs the broader market of late, but also showing strength throughout much of 2022. Healthcare is a service that we all need at various times of our lives, particularly as we age. America's aging population only continues to grow and as a result it's likely that the healthcare industry will experience robust demand for some time to come.
Everyone needs to eat, right? Consumer staples (XLP) tend to be more resilient during times of economic duress as the companies are sought after as safe havens, much like healthcare, because they produce necessities. People will cut down on buying discretionary items, but staple spending tends to be quite durable.
Metals and mining (XME) have shown an impressive amount of relative strength, suggesting that there are meaningful flows of capital entering the space. Particularly as we've seen some resurgence in pricing of various key metals of late.
Relative strength is a valuable guidepost for momentum-driven swing trades. I recently wrote a brief article about it, and plan to follow-up with more posts about opportunities that may arise from both relative strength and weakness.