Rotating Leaders, Rotating Laggards

One clear sign that a market has reached the top is a rotation of market leadership. When sectors that have led the market higher begin to falter, and when laggard sectors begin to show signs of life, you know that a changing of the guard is underway. 

During the past 30 days, we’ve seen several sectors that have led the market higher through much of 2009 begin to falter. Formerly leading sectors such as financials (down 5%), basic materials (down 4.5%) and transportation (down 5%), all have had tough slogging during the past four weeks.

Conversely, stocks in the formerly beaten-down energy space (up 4%), consumer staples (up 2.7%) and rising long-term interest rates, i.e., falling bond prices (up 2.5%), now are taking center stage as market winners in the last 30 days.

I think if we continue to see a sell-off in stocks, that sell-off will be worse in those sectors like financials, basic materials and transportation. That means if you are holding long positions in any of these sectors, it may be time to start thinking about reducing that exposure.

Of course, it also means that if you are looking for new sector leadership, you may have to look at sectors that didn’t fully participate in the run up that started in March.