December 2023 barometer update
I have done some more research on sector rotation theory. This aims to predict which sectors are likely to be favourable for investing at different stages of the investment cycle.
There are five phases of the investment cycle each of which are associated with outperformance of different sectors. These are as follows:
| Market Phase | High performing Sectors |
| Early Expansion | Technology, Consumer Discretionary |
| Middle Expansion | Telecommunications, Industrials |
| Late Expansion | Materials, Energy |
| Early Contraction | Consumer Staples, Healthcare, Utilities |
| Late Contraction | Financials, Real Estate |
I have examined each sector in the Investment Barometer to see whether it is bullish or bearish. I have coloured these sectors green or red accordingly. I have created a Sector Rotation Cycle Clock which illustrates this.
I examined the sectors and have determined that we are at the beginning of the Early Expansion Cycle where Technology is outperforming. To validate this, I wound back the Barometer to April 2022 where Healthcare, Utilities, Financials and Real Estate were all bullish thus marking the Early to Late Contraction phases.
Of course there are many anomalies in this theory e.g. Energy is outperforming and I don’t believe it’s currently Late Expansion, but it should be possible to look out for the next phase’s choice sectors i.e. Telecommunications and Industrials as part of Middle Expansion. I will comment on this in the months to come.
The FTSE 100 has settled down to close the month mid-way between its 7250 support and 7700 resistance levels. Miners have reacted positively to improved Chinese data. The US stock market believes that the Federal Reserve’s tightening phase is coming to an end.
To summarise the indicators:
The Barometer has risen 0. The first time that it has not been negative since May.
The Hi-Lo-Grometer has remained in the red zone (i.e. we are still not safe to buy stocks).
The US Treasury Yield indicator has dropped back to below -100 points which is not encouraging.
If I’m right that we are at the beginning of a new cycle, we could see some outperformance during 2024.
For further information, including the graphics, please visit: