ETFs Show Dubious Cyclical Rotation

For several months, there has been increased talk of a cyclical rotation and even some evidence to suggest the scenario was playing out.

Fast-forward to November, and the cyclical rotation theme should be entering its sweet spot. After all, November is the start of the best six-month period in which to own stocks, a time frame that is historically a good time in which to own sectors like discretionary and industrials – deep cyclical plays. Materials stocks and ETFs often shine in November as well. [Industrial ETFs: November Strong]

Materials ETFs such as the Materials Select Sector SPDR (XLB) have been solid performers as of late, but that is after an extended bout of under-performance against the S&P 500.

“That’s another sector that’s been getting some positive attention. But not only have materials been relatively week over the past month, but continue to be in a multi-year downtrend relative to the S&P 500,” writes J.C. Parets of All-Star Charts.

As for the high-beta financial services sector, Parets notes “financials peaked on a relative basis back in July and closed Wednesday at 7-month lows.”

Bolstering the case for some doubt around the cyclical rotation is that money has flowed out of the Energy Select Sector SPDR (XLE) , the Financial Select Sector SPDR (XLF) and the Technology Select Sector SPDR (XLK) since the start of October. To be fair, the Utilities Select Sector SPDR (XLU) has seen outflows of almost $21 million over that time.

Since Oct. 1, the Consumer Staples Select SPDR (XLP) and the Health Care Select Sector SPDR (XLV) have gained $1.33 billion and $270 million in assets, respectively.

Perhaps making matters all the more concerning for those banking on high beta sectors is that XLP has outpaced all over the riskier, cyclical SPDRs since late September. Actually, XLP has been the best of the nine SPDRs since Sept. 27. [Market may not Like What Staples ETFs Are Saying]