“A changing of the guard is upon us,” notes technician Richard Rhodes. In his The Rhodes Report, he explains his shift to go long the energy sector while shorting financials.”

“Technically, the broader bearish head & shoulders pattern in the Wilshire 5000 remains in place; thus the long-term downtrend remains in place and all rallies are considered countertrend moves.

“Moreover, many indices have now returned to major overhead resistance levels that are consistent with a risk-reward for returning to an aggressive short position.

“We’re going to a long Energy position, which we consider oversold while also taking a short position in financials.

“The Bear Stearns takedown marked the low for the financials in terms of market cap at $270 billion, which was broken as concerns about Fannie and Freddie came to the forefront. However, prices stabilized on the news that short selling was prohibited in the Big 19; and then rallied back into the Bear Stearns low.

“Now, with the rules having been taken off, we find Goldman Sachs and JP Morgan under attack by downgrades and short selling.

“Perhaps this will mark the highs in the Big 19 and the financials in general. Certainly it removes a bullish floor from the financial stocks after such a larger run-up. Thus, we are sellers of the financials for at least a test of the lows.

“Further, we would look to be more overweight Energy given the oversold condition as there is quite a bit of leverage in doing so given the enormous 6-week decline. Our trading strategy is rather clear; we want to be long Energy, which we consider oversold, and short the Financials, which we consider overbought.

“The tactical move out of Energy has been far overdone; in fact, we now see of the S&P 500 stocks, the Financials have regained the lead in terms of market cap for all of the S&P 500 at near 15% as they have rallied sharply recently; whereas the sharp decline in Energy has pushed the percentage to 12%.

“During the early 1980’s, we saw Energy stocks make up about 22% of the S&P 500; whereas recently the Financials made up 22% before their fall from grace. A changing of the guard is upon us; and we should realize the earnings potentials of each.

“Our long positions include Select Sector SPDR Energy, the Oil Service HOLDRs Trust and the United States Natural Gas Fund while our short positions include the Select Sector SPDR Trust Financials.

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