Pennsylvania Investment Observer

Market Rotation

by Daniel J. Nestlerode

Stock markets, like many other phenomena in life, seem to have recurring patterns. These recurring patterns have been identified by various publications including the Stock Market Almanac, published by Yale Hirsch and his son. Identifying these patterns can save investors a lot of money through loss avoidance. While no one can predict the future of stock prices with certainty, pattern recognition helps many investors.

We seem to be in the early stages of a market rotation where money flows from one sector or sectors to other sectors in the marketplace. So far this year, energy stocks and natural resource stocks have been the big winners on Wall Street. To this end, stocks like Exxon Mobile, Chevron Texaco, XTO Energy and Nabors Industries were big winners in the first quarter of 2005. The expectation and reality of higher oil prices helped these companies post significant increases in sales and earnings in the past several calendar quarters.

Now, however, a rotation out of these natural resource stocks seems to be under way. An examination of the price charts for the aforementioned stocks shows that their prices have been falling since their peak prices in March and April of this year. From a charting point of view, the price of these stocks has approached their two hundred day moving averages. If their prices decline through the two hundred day moving averages, then it is anticipated that lower prices are in store. Still, the jury is out on this move. These stocks could stabilize at their two hundred day moving averages or reverse and climb higher. Yet we have enough data to be concerned about the future for the stock prices for these companies. I would recommend caution to holders of these stocks, along with close scrutiny of their developing prices.

If the money seems to be flowing out of these natural resource stocks, where is it going? For now, we have a very short rally developing in the traditional large capitalization tech stocks. The stocks to watch would include Intel, Cisco, Dell, Applied Materials, Microsoft, Texas Instruments and others. These stocks have been out of favor with investors for five years even though they have made considerable sales and earnings progress during this period. I am not recommending buying these tech stocks. I am, however, pointing them out as an example of market rotation. Of course, a complete market rotation is only provable after the fact, so I recommend paying attention to this phenomenon.

Market rotations are quite different actions than the secular declines we are witnessing in General Motors, Ford, AT&T, MCI, and some of the major pharmaceutical companies. But that is an article for another day.

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