Sector rotation screen – 2026-05-24

What the screen said this week

The screener classified the current environment as mid-cycle based on year-over-year industrial production growth of +1.4% (a measure of manufacturing and utility output) paired with a positive trend (+0.49 on the curve). That combination—steady expansion without overheating—typically favors growth-oriented sectors in the model's framework.

Technology (XLK) was the only sector to clear the composite threshold of 65 for a "Buy" signal, scoring 92.3. It posted a perfect 100 on cycle fit, strong relative strength (95.2), and an 80.6 seasonality score, with three-month relative strength at +20.82%. Communications (XLC) ranked second at 60.6 but remained a "Hold"; its relative strength component lagged at 15.8 despite matching Technology's cycle fit, and the seasonality score carried a thin-sample warning. Energy (XLE) also held a mid-table "Hold" position.

Four sectors fell into "Avoid" territory (composite ≤ 40): Financials, Consumer Staples, Healthcare, and Utilities. All four showed cycle-fit scores of 35 or 50—well below the 100 assigned to sectors the model associates with mid-cycle conditions—and relative strength below 27. Three-month relative performance for these four ranged from –6.66% to –14.63%.

Things worth noticing

Communications illustrates the tension between cycle-phase alignment and actual price momentum. It shares Technology's perfect cycle score and nearly identical seasonality, yet its relative strength component sits at 15.8 versus Technology's 95.2, resulting in a 31.7-point composite gap. The "(thin sample)" flag is a reminder that XLC only began trading in mid-2018, so its historical seasonal pattern rests on fewer cycles than the other nine sectors.

Energy occupies the middle of the pack with neutral scores across the board—50.0 cycle fit, 50.3 seasonality, 64.0 relative strength—producing a 55.7 composite. It has essentially flat three-month relative performance (–0.99%), making it the screener's Switzerland this week. Meanwhile, Materials, Industrials, and Consumer Discretionary cluster tightly in the low-to-mid 40s despite traditionally being considered cyclical; all three show 50.0 cycle fit yet suffer from negative three-month relative strength in the –5% to –14% range, dragging their composites below the 65 threshold.

The 15-year backtest result is prominent and unfavorable: the strategy returned +224.93% versus +595.59% for SPY (the S&P 500 ETF), net of a 10-basis-point trading cost assumption. That underperformance is a property of this particular rule set over that historical window, not a statement about rotation strategies in general.

Methodology reminder

The composite score is the weighted sum of three components: 30% seasonality (historical calendar patterns), 30% cycle fit (alignment with the current macro regime), and 40% relative strength (recent price momentum versus the market). The backtest controls for lookahead bias by using FRED ALFRED data vintages—macro indicators as they existed on each historical decision date, not revised figures. The backtest result describes how these specific rules and thresholds behaved in the past; it is not a forecast of future results.