February 13th, 2023

How To Rank Sectors To Determine Future Market Movements

The outstanding question remains whether the start of 2023 was the start of a bull market, or if this was just one giant short squeeze.

What is a short squeeze?

As news of an impending recession rippled through the markets and 2022 closed without much of a Santa Rally, investors grew increasingly more bearish and kept selling stocks. Short selling made huge gains in 2022, so it made sense to continue the trend.

So what happens when everyone shorts the market?

As prices dropped, institutional buyers stepped in to buy some of the heaviest-hit stocks from 2022. Institutional buying started driving the price of the underlying stocks higher and that forced the short sellers to buy back their positions. A new wave of buying continued. Next, you had the algos picking up on the buying and they joined in. Companies like Telsa (TSLA) have gone up by 100% in a few weeks.

The sector that had the best performance over the last month was Technology – one of the biggest hit in 2022. What about the rest of them? Here’s how the various sectors performed over the last month.

However, we could see this near-term, more aggressive trend continue higher, in which case we’re bouncing off a support line and should move higher from here. If the market responds positively to the economic data released this week, we could follow this path instead.

Before we get too excited, let’s see which sectors have been performing the best over the past week.

We can see that Energy is back on the rise (the only sector that finished up over the last five days) while Tech and Consumer Discretionary fell.

This week is a new week, but seeing some of the more defensive sectors rise to the top of the best-performing sectors in the last week doesn’t bode well for continuing on the blue trend path vs the black trend path from the charts above.

We can rank the best-performing sectors by combining the rank from three different time frames (1 month, 1 week, and 1 day) and dividing by three. Here we can see that Energy has been performing the best overall. So while the tech sector has been leading the market higher over the past month, it has fallen off this past week and on Friday.

To be fair, I’m only comparing a one-month performance to a one-week and one-day performance and maybe more weight should be placed on monthly performance, but an exercise like this can help you identify underlying trends and identify sectors that may lead the market in the near term.

The question is – do you believe Tech is likely to reset and move higher from here after a week off? After earnings, does that sector have anything left in the tank?

Or do you think Energy is likely to continue as the leader of the pack this week?

Of course, technical charts and indicators may be overridden by the slew of economic data traders will have to contend with this week.

Once again we have a big week on the news front. We could see the CPI report show an increase in inflation in the month of January. That could send shockwaves through the markets, so let’s take a look at the reports you need to know about.

The reports coming out this week cover January’s data, so, it’s no surprise that some of these reports are showing positive news after the market went on a nice rally, but will investors use this data to keep the rally oing?

Tuesday – 8:30 am EST – CPI – The consumer price index showed a month-over-month decline of 0.1% in December, but the January report is expected to show a gain of 0.5%. However, the year-over-year number is expected to moderate from 6.5% in December to 6.2% in January. How will the market react to a monthly gain if year-over-year stays the same or goes lower? Either way should bring volatility to the markets.

Wednesday – 8:30 am EST – Retail Sales – Sales contractions in November and December were deeper than expected, and even though January is typically the lightest sales month of the year, the numbers are expected to show a 1.7% gain month-over-month.

Wednesday – 9:15 am EST – Industrial Production – Industrial Production has been falling into contraction, however, January’s report is expected to show a slight gain of 0.5%, vs the -0.7% in December. Manufacturing Output is also expected to rise from -1.3% in December to +0.4% in January.

Thursday – 8:30 am EST – Housing Starts and Permits – January’s report is expected to show a slight dip in annualized rates of starts and a slight bump higher in permits.

Thursday – 8:30 am EST – Jobless Claims – Jobless claims came in low last week at 196k and are supposed to have a slight uptick this week to 199k, bringing the 4-week moving average to 189.25k.

Thursday – 8:30 am EST – Philadelphia Fed Manufacturing Index – Similar to the Industrial Production numbers, the market is expecting to see the manufacturing index tick higher, up from -8.9 in December to -7.2 in January. While there has been improvement in consumer confidence and an easing in inflation, the number is still expected to be negative but improving.

Thursday – 8:30 am EST – PPI Final Demand – Producer Prices are expected to increase month-over-month from -0.5% in December to +0.4% in January. However, the year-over-year data is expected to show improvement from 6.2% down to 5.5%. If you exclude energy, that number drops further to 5.0%. Similar to CPI, it looks like we will see a higher monthly number but a drop if we compare it to a year ago.

Thursday – 8:45 am EST and 6:00 pm EST – Loretta Mester Speaks

Keep the risk in check and be prepared for intraday moves. It could be another wild week. I’ll be back tomorrow but will keep trading light this week between CPI and PPI reports.

If you have any questions, comments, or anything we can help with, reach us at any time.
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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.