Sector Rotation – The week ahead

I think its safe to say that we are firmly in the midst of sector rotation, we are seeing a flight out of tech and into the typical safe havens of the market. Specifically Energy and Commodities.

Crude is back on a tear as the energy situation continues to deteriorate worldwide, and utilities are starting to look friendly again as prices are coming down. A simple way to look at this rotation is by looking at the indices. The Nasdaq and the S&P are a great proxy for this. The Nasdaq, comprised of mostly high beta names, has been falling at a much faster rate then the broad market, measured here by the ES.

The other way to look at this is to see what is happening in individual stocks. META, NFLX, AMZN, and AAPL have all seen almost zero bid as of late. This is a pretty clear sign that bigger funds are moving out of Tech for another place. One of these is the Utilities sector.

XLU is the chart to the left and appears to have caught a bid, especially going into the end of the week.

I think we see this type of rotation continue as there are a lot of potential pitfalls this week. Historically Energy and utilities have been a safe haven and I see no reason to assume that’ll be any different this time around.

One of the ways I am trading it personally is to Short pops in tech through the use of Put options, and to buy any dips in oil through the use of call options. If Options on Futures are not your thing, you can always use an oil ETF or Oil company like XOM (Exxon Mobile) as a proxy for the trade. Last week it was a profitable strategy and I see no reason for that to change.