Will 2021 prompt a big rotation in sector trends? - Part I
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
An interesting question was brought to my research team recently related to sector trends in 2021 and what may shift over the next 10 to 12+ months. It is very difficult to predict any future trends that may set up over the next year or longer, but we took the effort to consider this question and to consider where trends may change over time. The one thing my research team and I kept returning to is “how will the global economy function after COVID and how much will we return to normalcy over the next 12 to 24+ months?” We believe this key question will potentially drive sector trends and expectations in the future.
When COVID-19 hit the globe, in early 2020, a forced transition of working from home and general panic took hold of the general public. Those individuals that were able to continue earning while making this transition moved into a “protectionist mode” of stocking, securing, preparing for, and isolating away from risks. This shift in our economy set up a trend where certain sectors would see benefits of this trend where others would see their economies destroyed. For example, commercial real estate is one sector that has continued to experience extreme downside expectations while technology and Healthcare experienced greater upside expectations.
Longer-term Sector Trends – What's Next?
When we look at a broad, longer-term, perspective of market sectors, we can see how many sectors have rallied, some are relatively flat, and others are still moderately weak compared to pre-COVID-19 levels. The top row of these charts, the $SPX (S&P500), XLY (Discretionary), XLC (Comm Services), and XLK (Technology) sectors have all shown tremendous rallies after the COVID-19 lows in March 2020. We can also see that XLI (Industrials), XLB (Materials), and XLV (Healthcare) have all started to move higher recently.
One needs to consider the manufacturing component of technology, S&P 500/Industrial related companies, Technology and Healthcare services/products in relationship to Materials and Material/Chemical manufacturing. Many of these industries require massive amounts of raw materials in order to build and supply finished products to the marketplace. This suggests a broad commodity sector rally may be setting up while other stronger sectors continue to rally.
Any resurgence of the global economy after nearly a year of efforts to find an effective cure vaccine/cure for COVID-19 will likely prompt capital to search out undervalued and strong sector trends. Given the strength of the NASDAQ & Technology sectors as well as the Discretionary sector recently, we believe a shift this likely to focus on Healthcare, Commodities (Basic Materials, Agriculture and Metals), and certain manufacturing sectors – almost like a resurgence of the manufacturing/industrial economy.
SPY Monthly Chart Shows Clear Breakout Rally Attempt
When we compare the longer-term rally in the SPY to the QQQ (see the two charts below), we can clearly see the SPY has just recently rallied above the YELLOW trend line from the lows established in 2009 & 2010. These lows represent a critical support/resistance channel for the markets moving forward from the 2009 market bottom. They also represent an acceleration phase cycle in price when the price moves above this level.
Throughout almost all of 2011~2020, we can clearly see the price trend stayed below this YELLOW level. Recently, though, the SPY price has rallied above this level for the first time since early 2011. This suggests a broad SPY rally as initiated and that further upside price trending is likely as long as prices stay above the YELLOW support level. If this level fails in the future, then a larger downside price trend may prompt a deeper price correction.
The important factor for this chart is the recent rally above the YELLOW support channel. The resurgence of the global economy and global central bank support may be prompting a very strong upward price phase – something we have not seen in more than a decade.
QQQ Has Continued A Very Strong Rally Since 2009
Comparing the same levels of the SPY chart to the QQQ chart presents a very different picture. The QQQ price activity has, almost continually, stayed above the same YELLOW support/resistance level originating from the 2009 bottom. This suggests that the strength of the technology sector, a major component of the NASDAQ, drove quite a bit of upward market expansion over the last 10+ years and is continuing to drive market prices higher. This incredible trend related to technology services, products, support, and infrastructure has really served as a technological revolution over the past 2 decades. Yet, will these expectation last if the market changes dynamics?
It appears the QQQ is poised to target the $356~$357 level, which would complete a full 200% Fibonacci Measured Move to the upside. If and when that happens, we may see some increased volatility/rotation in the NASDAQ/Technology sector after watching this sector rally more than 100% from the March 2020 COVID-19 lows.
Of course, technology will still continue to play a major role in our lives, but we may see these sectors attempt to restructure and re-balance if a new Commodity/Basic Material/Manufacturing phase takes root. This process may take place over many months or years, but we believe it is very likely given the extent of the rally phases of these sectors and the process of rebuilding a functioning global economy.
In Part II of this article, we'll dive deeper into the trends and setups that make this shift in global market sector a real potential for future profits. Remember, we are not making any call that the market it topping or collapsing from these levels. We believe the resurgence in the global economy may prompt a restructuring of value in many sectors over the next 2 to 3 years – where Commodities, Basic Materials, and Manufacturing may suddenly become hot sectors as the global economy attempt to rebuild after COVID-19. This does not detract from the bullish trending in current sectors, it just means many undervalued sectors may become very hot over the next 15+ months.