January -- ETF Sector Rotation Trading -- 28-Day CycleI may not explain this well but try to follow me here. Just before the market rolled over and lost more than 9% last January all the proper bull market sectors were very strong during the previous 28 days. This is normal and a strong sign that market participants were bullish on the overall market. But the market was overbought, and trading volume was light indicating that not many people are willing to buy at these lofty prices. And the CBOE Volatility Index had reached an extreme low (a level that has triggered large selloffs in the past). All this means one thing to me: Trade with caution and tighten your protective stops.
A general rule: If everyone is buying all the hot stocks at these overbought levels then you can't help but think it's time for the market to roll over and shake them all out.
March -- ETF Sector Rotation Trading - 28-Day CycleThe chart of March shows where the sectors have finished over the past 28 days. Notice how similar the sectors have appreciated in price. I have overlaid John Murphy's sector rotation image to show which sectors are strongest in a bull market. Now the interesting part is that it appears to be the same setup as in January. My quote system is flashing new highs for the bear market cycle sectors which are the ones which haven't performed well (staples, services and utilities) and I have to think the market is about to take a breather or do a swan dive. Don't get me wrong, I am not saying we are on the verge of a bear market. I actually think the market is strong and will trade sideways in a large range for most of this year or just continue to trend up.
What I'm saying is that these sectors go in and out of favor during smaller market cycles and that can be very useful information.