Sector Detector: Sector rotation model stays bullish, although fundamental rankings are still stuck in neutral

Courtesy of Sabrient Systems and Gradient Analytics

Scott MartindaleIn a year in which stock prices mostly have been driven by news rather than fundamentals, three things stood out last week. First, terrorism has taken on an unsettling new face — the stay-at-home mom down the street or your long-time co-worker at the plant — as the dark side of the exponential growth in social media rears its ugly head (with something much more sinister than porn sites or online bullying). Second, with the strong jobs report on Friday, the Federal Reserve seems to have all their ducks in a row to justify the first fed funds rate hike in nine years. And third, oil prices may remain far lower for far longer, with potentially more negative than positive impacts. Nevertheless, bulls continue to be comforted by seasonality and a strong technical picture (which is shaping up much like 2011). Thus, although our fundamentals-based sector rankings remain mostly neutral, the sector rotation model still reflects a bullish bias.

In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.

Market overview:

Friday’s jobs reported was a big market mover. It showed that the U.S. economy created 211,000 jobs in November, beating expectations. September and October data was revised to show 35,000 more jobs than previously reported. And the official unemployment rate remained at 5% (i.e., what is generally considered to be full employment).

In response, U.S. stocks jumped more than 2% on Friday, with the Dow Jones blue chips and S&P 500 large caps posting their biggest one-day gains in three months. Nine of the ten S&P 500 business sectors climbed — all except Energy, which fell after OPEC failed to put a lid on its near-record output.

Oil is the proverbial Goldilocks market that needs to be not too hot and not too cold to work for all market segments. Too low creates instability in oil-exporting countries and threatens the health and livelihood of our domestic industry, with its high-paying jobs, and that’s where we are today, and apparently heading lower.

The dollar,…
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