Founder’s Note: Sam Gatlin is early in his career.
But he’s already taken to heart some of the most important lessons traders and investors must learn if they want to have long-term success.
Here he is with some ancient wisdom from Athens, Greece… – JC
By Sam Gatlin
Every hour in front of the Hellenic Parliament in Athens, Greece, the Evzones march out in full dress and perform the changing of the guard.
If you’ve never seen it in person, it almost doesn’t feel real.
The pacing is slow and deliberate, the choreography is flawless, and the entire square goes silent as one guard steps aside and another takes his place.
No one announces it and no one explains it because no one needs to. The duty stays the same, but the players rotate through with absolute precision.
As I was standing there in Syntagma Square this week, watching the guards shift positions under that massive marble monument, it struck me just how similar the moment feels to what’s happening in the market.
We’re in the middle of our own changing of the guard.
The leadership that carried us off the April low earlier this year is stepping back. Meanwhile, the groups investors ignored all year are quietly marching to the front of the line.
Sector Rotation Is the Lifeblood of a Bull Market
One of the most important lessons I’ve learned came from Ralph Acampora, the godfather of technical analysis.
I finally met Ralph in Dubai at the CMT Global Investment Summit a few weeks ago, after reading and quoting him for years.
Ralph’s message was simple: To have a prolonged bull market, leadership must change hands.
When one group gets tired, another steps up. The guard changes.
The cleanest way to see that today is on the Weekly Relative Rotation Graph (RRG):
Julius de Kempenaer, another legend I was lucky enough to meet in Dubai, built this tool to visualize rotation. It’s one of my favorite market cheat codes.
On the X axis, you have the relative strength ratio vs the benchmark (the S&P 500 in this instance).
And the Y axis shows relative strength vs momentum.
On the RRG, you have four quadrants: Leading, Weakening, Lagging, and Improving. Assets (S&P 500 sectors in this instance) move through those quadrants clockwise over time.
On this weekly RRG, each tail covers 14 weeks, so you can literally see the journey.
You can see that Energy, represented by the Invesco S&P 500 Equal Weight Energy ETF (RSPG), and Healthcare, or the Invesco S&P 500 Equal Weight Healthcare ETF (RSPH), started deep in the Lagging quadrant months ago.
Since then, they’ve soared through Improving and they’re now solidly in the Leading quadrant.
Technology, represented by the Invesco S&P 500 Equal Weight Technology ETF (RSPT), did the opposite…
It’s been bleeding lower out of the Leading quadrant, headed straight toward Weakening and Lagging.
That’s the changing of the guard in one picture.
Most portfolios are still built like nothing has changed. Overexposed to Technology, and underexposed to Energy and Healthcare.
That divergence is the opportunity.
Energy and Healthcare Are Breaking Out
The RRG provides an aerial view. Now, let’s look at the ratio charts to see the boots on the ground.
Start with Energy versus the S&P 500. I’m using RSPG divided by the Invesco S&P 500 Equal Weight ETF (RSP):
This ratio has spent most of the year carving out a textbook bearish-to-bullish reversal pattern. Every time it hit the same resistance area, sellers showed up and knocked it back down.
Not this time.
RSPG is now breaking above a shelf of former highs and trading at the highest relative level since April relative to RSP.
This is precisely what brand-new uptrends look like.
Healthcare tells the same story. For this ratio, I’m using RSPH divided by RSP:
It’s the same reversal pattern I just showed you with energy. Healthcare is in a brand-new uptrend relative to the broader market.
This is the kind of sector rotation that keeps bull markets alive.
Now compare that with Technology, the sector that’s being rotated out of.
For this ratio, I’m using RSPT) divided by RSP:
Technology has gone from a steady uptrend to what appears to be a classic distribution pattern relative to the broader market.
It has rolled over from the highs, and it looks poised to enter a brand-new downtrend.
If you’re running a portfolio that still assumes technology will do all the work forever. That’s a problem right now.
The Money Is Made Where No One’s Looking
Here’s the part that really drives people crazy.
Energy is less than 3% of the S&P 500. It’s one of the smallest sectors in the whole index. It could double in price and barely move the S&P.
Most investors take that as a reason to ignore it.
To me, that’s the bullish case.
When something is tiny, unloved, and irrelevant to the benchmark, it doesn’t take much attention for the gains to get dramatic.
The flows don’t have to be huge. They just have to show up, and the charts say they’re starting to.
That’s how rotation always looks in real time: uncomfortable, inconvenient, and easy to dismiss.
The crowd says stuff like…
“This isn’t the 1970s. Nobody cares about energy.”
“Healthcare is boring.”
“Tech always comes back.”
They’re focused on yesterday’s guard. I’m focused on who’s currently taking the post because I’m trying to make money today.
This isn’t a call to short Technology into the abyss. It’s a call to recognize that leadership is changing and to position accordingly.
In a bull market, you don’t fight rotation. You ride it.
What I’m Doing About It
At TrendLabs, our process starts with the current market environment, and then we decide which tools and strategies are best for it.
The environment today says Energy and Healthcare are moving from laggards to leaders. So every day, I’m looking for the best risk-to-reward opportunities in those sectors.
Technology is moving in the other direction, so I’m not spending my time looking for tech stocks to buy.
We’re watering our flowers in Energy and Healthcare and cutting back our weeds in Technology. Not because we “hate” Tech, but because right now, other guards are doing the heavy lifting.
Most investors will do the opposite. They’ll cling to their overweights in Technology because it’s familiar and underweight the new leaders because they feel late.
That’s how you end up on the wrong side of the rotation, and eventually on the wrong side of the bull market.
The guards in front of the Unknown Soldier in Athens don’t argue with the schedule. When it’s time to rotate, they rotate. There’s no drama or ego in the decision. Just discipline.
That’s how we need to behave as investors.
When the evidence says the guard is changing, you don’t debate it. You step aside and let the new leaders take their posts, and you align your portfolio with the stocks that are actually on duty.
Stay sharp,
Sam Gatlin
Analyst, TrendLabs