The trade for Q1 was energy. Essentially this trade was driven by inflation. With oil rising back to near 2008 highs, the energy stocks complied.

So where to in Q2?

Classic business cycle analysis identifies the following relationships:

Stage 1: Bonds turn up [stocks and commodities falling]
Stage 2: Stocks turn up [bonds rising, commodities falling]
Stage 3: Commodities turn up [all three markets rising]
Stage 4: Bonds turn down [stocks and commodities rising]
Stage 5: Stocks turn down [bonds falling, commodities rising]
Stage 6: Commodities turn down [all three markets fall]

First Stocks:

Second Commodities:

Third Bonds:

From the charts we can conclude that we are in a stage 4 scenario. Thus at some point, we are likely to enter Stage 5, where Stocks turn down, largely due to rising interest rates in the Bond market, while commodities, under the driver of inflation, continue to rise.

As we are primarily concerned with the Stock sector, what sector is likely to outperform into the last cycle before stocks broadly fall? Energy is the part of the late expansion in a market sector analysis: the last sector to participate in an expansion prior to a fall in the market are Consumer Staples.

Sector rotation would suggest moving out of energy, taking profits [at some point] and rotating into Consumer Staples. The top 10 holdings:

TOP 10 HOLDINGS
NAME % NET ASSETS
Procter & Gamble Company 15.23%
Wal-Mart Stores, Inc. 9.47%
Philip Morris International, Inc. 8.95%
Coca-Cola Company 7.37%
Kraft Foods, Inc. 4.60%
CVS Caremark Corporation 4.49%
PepsiCo, Inc. 4.41%
Altria Group Inc. 4.23%
Colgate-Palmolive Company 3.49%
Walgreen Company 3.42%

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