I find it amazing that there is a debate raging about whether or not the US economy is in a recession or not. The concept of sector rotation has been around for many years, and although some academic economists dismiss its value, history clearly supports sector rotations validity.

If you are not familiar with the concept of sector rotation, here is a great article about Top Down Investing that does a great job of explaining sector rotation.

Using Sector Rotation Model To Understand Where We Are in the Economic Cycle

There can be little doubt that the economy ebs and flows in a continuing cycle of highs and lows. It should be obvious that I believe the essence of sector rotation, and that it can be used to identify wheter or not the economy is in a true recession. The follow table is a list of the relative strength of each sector taken from clearstation.etrade.com:

As you can see, the best performing sectors are currently Healthcare and Consumer non-cyclicals followed by transportation. On the sector rotation model, this puts us somewhere between early recession and middle recession. So like I said, how can there really be any debate.

How To Trade This Information

Once oil and natural gas prices settle out, I would expect utilities to start showing some strength. followed by a recovery in the financials. I would pick best of breed stocks in these sectors on any dip. You could also trade healthcare until we see the relative strength start to dip. My suggestions:

Healthcare – CMED (China Medical)
Utilities – PGN (Progress Engery)
Financials- GS (Goldman Sachs)

Last 5 posts by Steve Warshaw

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