In our company’s style of wealth management, we have many strategies; one of which is a sector rotation model. The system typically purchases 3 sectors or countries each month out of a basket of 40. The sectors we purchase are determined by a series of 4 technical analysis indicators. As I get the signal, though, I can’t help but consider what fundamental or economic scenario might be setting them up for success. These articles will be a monthly commentary detailing what we’re doing and why it might make sense from a technical and/or fundamental perspective.
For the month of August, our three sectors are Insurance (KIE), Housing & Construction (XHB), and Health Care (FXH).
Occasionally in our process of sector rotation we have a sector that stays “in the zone” for more than one month. That is the case this month with Insurance, which we bought initially at the end of June and we will continue to hold for another month. From a fundamental perspective this sector makes a lot of sense. Insurance companies are constantly investing the premiums they receive into a variety of bonds and other fixed income instruments. The prospect of the fed beginning to raise interest rates very soon will really help this sector (along with many other financial sectors) improve the performance of their investment holdings.
Homebuilders was added this month. The chart looks like it’s very close to a breakout and the thing that I like about this sector is that a big piece of its costs are related to raw materials. Because the value of most commodities have been getting hammered in recent months, I expect that that could decrease the cost of materials for builders and thus increase their profit margins. Also, the low interest rate environment coupled with the expectation that rates will rise soon could motivate business owners to hurry and build their buildings and apartments now in order to lock in low rates before they could potentially go higher. This would have the effect of creating higher demand in the near-term.
Health care has been a good bet for quite some time now. Its uptrend has been so resilient, and even the smallest pullbacks seem to be met with quick support. It’s no secret that as the Baby Boomer generation ages, larger and larger chunks of the wealth that they have accumulated over their lifetime will go to Hospitals and Long Term Care facilities to meet their health care needs. Combine that with the increases in premiums and participants in Health insurance because of Obamacare and the incredible advances health technology, and it is making for a trend that is hard to bet against. Simply put, there is a lot of money flowing into this sector that should help it continue to perform.