One Chart Reveals The Sector Rotation In The Stock Market

In case you are still wondering what’s happening in the stock market since November 2021, the chart below will give you a clear picture.

Based on the ratio chart IVW/IVE where IVW is S&P 500 Growth ETF and IVE is S&P 500 Value ETF, it can be observed that the price peaked in mid of November 2021 followed by a lower high and lower low and had a sharp selloff in the first week of January in 2022.

As shown the price action of the above chart, the growth stocks started to underperform the value stocks in December 2021 (since it formed a lower high and a lower low) and the scenario is getting worse as reflected in the selloff last week.

Another thing to pay attention to is the increasing of the volume during the correction as this suggested urgent selling by the institutional investors. Nuances of the price and volume are to be studied via volume spread analysis in order to detect the subtle difference between institutional selling versus a normal pullback.

Effect of Fed’s Tapering to the Stock Market

This is In line with the Federal Reserve’s announcement of reducing the monthly bond buying program back in November 2021 because lots of leading growth stocks like Sea (SE), Shopify (SHOP), Upstart (UPST), Zscaler (ZS), Bill.com (BILL) started a steep correction since mid of November 2021.

There are tell-tale signs behind the sharp decline of the growth stocks, which you can refer to the post on the deterioration of the stock market breadth to find out how to judge the overall health in the stock market.

As the growth stocks are very sensitive and vulnerable to credit tightening environment, it is not surprised to see them kick start the correction especially given their rich valuation in 2021.

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Sector Rotation to Energy, Finance and Consumer Sectors

While the sector rotation is on-going with the growth stocks being abandoned, cyclical and defensive sectors like Energy (XLE), Finance (XLF) and Consumer (XLP) are breaking all-time high, as shown in the chart below:

Consumer staple (XLP) sector is traditionally a defensive sector. So, it is not surprised to have money flows in upon a market correction or a technology sector selloff. The cyclical sectors like the energy and finance are bucking the trend of the market thanks to the Santa Claus rally in crude oil and the expectation of rising interest rate macro environment, with at least 2-3 rate hikes coming in 2022 as guided by Fed.

S&P 500 Price Prediction

S&P 500 futures (ES) broke below the critical support at 4710 on 5 Jan 2022 and subsequently it failed to rally back above, which is a bearish sign for more weakness ahead. Should S&P 500 break below 4660, lower price targets at 4600 and 4500 could be expected. Refer to the chart below:

Since S&P 500 is vulnerable for a correction, if you are keen for a long trade, it is essential to carefully select the stocks within these outperforming sectors (XLP, XLE, XLF) with the best entry setup and high reward to risk ratio. Stop loss is essential for trading in case the trade setup fail due to the market weakness. Else shorting weak stocks like those in the ARKK ETF could be a better choice.