Sector Rotation Screen — 2026-05-10

What the screen said this week

The screen classified the economy as mid-cycle based on industrial production (INDPRO) growing +0.7% year-over-year with a positive second derivative (+0.49). This puts growth in the 0–4% band the methodology associates with steady expansion. Under the rules, mid-cycle assigns maximum cycle-fit scores (100.0) to Technology and Communications, moderate scores (50.0) to most cyclical and defensive sectors, and lower scores (35.0) to traditionally defensive sectors like Consumer Staples, Utilities, and Healthcare.

Technology (XLK) topped the composite at 91.3, earning a Buy signal. It combined the maximum cycle-fit score with strong three-month relative strength (+17.43%) and a seasonality score of 80.0. Communications (XLC) also crossed the Buy threshold at 65.5, though the screen flags its seasonality data as a "thin sample" and its recent relative strength is negative (–5.76%). Five sectors landed in Hold territory (composite 40–65), while four triggered Avoid signals: Consumer Staples, Utilities, Financials, and Healthcare all scored below 40, weighed down by both low cycle-fit assignments and sharply negative relative strength over the past three months.

Things worth noticing

Financials (XLF) received a mid-cycle score of 50.0 yet ranked near the bottom of the table (composite 35.0, Avoid signal) due to the weakest relative-strength reading in the screen: –12.18% over three months and an RS component of just 10.3. Because the composite applies a 40% weight to relative strength, recent price underperformance can override a neutral cycle assignment. Healthcare (XLV) showed a similar pattern—decent seasonality (63.1) but a cycle penalty (35.0) and the worst RS in the set (–15.74%), yielding the lowest overall composite.

Communications (XLC) illustrates the risk of thin historical samples: its seasonality score of 86.6 is the second-highest in the screen, yet the parenthetical warning signals limited data. Investors reviewing open-source backtests should verify sample size before weighting any component heavily. Meanwhile, the 15-year backtest result (+224.93% strategy vs. +595.59% SPY) shows this particular rule set underperformed buy-and-hold by a wide margin after trading costs, underscoring that mechanical rotation does not guarantee outperformance and that past results do not predict future outcomes.

Methodology reminder

The composite score is a weighted average: 30% seasonality + 30% cycle fit + 40% relative strength. Backtest integrity relies on FRED ALFRED vintage data to prevent lookahead bias—each historical decision uses only the macro data that existed on that date. The backtest summary reflects the historical performance of this specific rule set and is not a forecast of future returns or a recommendation to trade.