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U.S. Sector Rotation Report

  • Writer: Lester Davids
    Lester Davids
  • 3 hours ago
  • 5 min read

Research Notes January 2026 > https://www.unum.capital/post/rjan2026

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US Sector Rotation


The US market closes 2025 with a distinct shift in character. The "Mag 7" dominance represented by Technology is showing signs of fatigue, entering a consolidation phase. Meanwhile, capital is aggressively rotating into Communications and Healthcare. Conversely, the "Defensive" sectors are under severe pressure, showing signs of capitulation.


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Here is the breakdown of the current US sector rotation dynamics.

1. IMPROVING / LEADING (The New Leaders)

Neutral Long-Term Trend + Strong Short/Medium Momentum

These sectors are currently generating the most alpha. They are actively climbing the curve and attracting the bulk of tactical flows.

  • Communications (XLC) vs SPY

    • Status: Neutral (Long) / Strong (Medium) / Strong (Short).

    • Analysis: This is the strongest sector on the board right now. With both Medium and Short-term momentum reading "Strong," XLC is aggressively moving from the "Improving" quadrant potentially into "Leading." It appears to be taking the leadership baton from Technology.

  • Healthcare (XLV) vs SPY

    • Status: Neutral (Long) / Strong (Medium) / Neutral (Short).

    • Analysis: Healthcare is waking up. The "Strong" medium-term signal suggests institutional accumulation is underway, rotating capital out of other areas into this defensive growth pocket.

2. WEAKENING (Consolidation)

Strong Long-Term Trend + Neutral Momentum

  • Technology (XLK) vs SPY

    • Status: Strong (Long) / Neutral (Medium) / Neutral (Short).

    • Analysis: The long-term bull trend remains "Strong"—the structural thesis is intact. However, the drop to "Neutral" on shorter timeframes confirms a pause. Tech is no longer driving the daily gains; it is digesting its massive run. This is a classic "Weakening" quadrant setup: time correction rather than price destruction.

3. LAGGING (The Drags)

Weak/Bearish Trend + Weak/Neutral Momentum

The "Defensive" cohorts are being liquidated.

  • Consumer Staples (XLP) & Real Estate (XLRE)

    • Status: High Bearish Momentum / Approaching Oversold.

    • Analysis: These are toxic charts. The "High Bearish" tag combined with "Weak" medium-term momentum indicates aggressive distribution. They are approaching "Oversold," which might spark a bounce, but the trend is broken.

  • Utilities (XLU)

    • Status: Weak across Long and Medium terms.

  • Consumer Discretionary (XLY)

    • Status: Neutral (Long) but Weak (Short).

    • Analysis: This is concerning. Unlike Tech which is resting, Discretionary is actively losing short-term momentum, sliding towards the Lagging quadrant.

4. THE CENTER (Stabilizing / Neutral)

Weak/Neutral Trend + Neutral Momentum

  • Financials (XLF): Neutral across all timeframes.

  • Energy (XLE), Materials (XLB), Industrials (XLI): Weak Long-term trends, but Neutral short-term. They have stopped falling but haven't started rising. They are essentially "dead money" for now.

MOMENTUM FLASH CARDS

Here are the tear sheets for the key US sectors based on the data.

QUADRANT 1: THE ACTIVE BULLS (Improving/Leading)

MOMENTUM FLASH CARD: COMMUNICATIONS (XLC)

  • RRG STATUS: IMPROVING $\rightarrow$ LEADING

  • PROFILE: Accelerating Momentum.

  • QUARTERLY PULSE (Long Term): NEUTRAL.

    • Analysis: The long-term trend has repaired enough to leave "Weak" territory. It is ready to challenge for leadership.

  • TACTICAL MOMENTUM (Short/Med Term): STRONG / AGGRESSIVE BUY.

    • Analysis: This is the only sector with "Strong" readings on both Medium and Short timeframes. It is the current "Alpha Engine."

  • THE PLAYBOOK:

    • Action: OVERWEIGHT.

    • Strategy: Momentum Capture. This is where the hot money is flowing. Buy dips aggressively.

MOMENTUM FLASH CARD: HEALTHCARE (XLV)

  • RRG STATUS: IMPROVING

  • PROFILE: Institutional Accumulation.

  • QUARTERLY PULSE (Long Term): NEUTRAL.

    • Analysis: Stable. Not a drag, but not yet a structural leader.

  • TACTICAL MOMENTUM (Short/Med Term): BULLISH.

    • Analysis: The "Strong" Medium-term reading suggests a steady bid under the market.

  • THE PLAYBOOK:

    • Action: ACCUMULATE.

    • Strategy: Rotation Trade. As Tech rests, money is parking here.

QUADRANT 2: THE RESTING GIANT (Weakening)

MOMENTUM FLASH CARD: TECHNOLOGY (XLK)

  • RRG STATUS: WEAKENING

  • PROFILE: Strong Trend + Fading Momentum.

  • QUARTERLY PULSE (Long Term): STRONG BULLISH.

    • Analysis: The only sector with a "Strong" long-term reading. The secular bull market is intact.

  • TACTICAL MOMENTUM (Short/Med Term): NEUTRAL / PAUSE.

    • Analysis: Momentum has neutralized. The sector is likely range-bound or consolidating.

  • THE PLAYBOOK:

    • Action: HOLD.

    • Strategy: Volatility Compression. Do not chase highs. Wait for momentum to reset before adding new exposure.

QUADRANT 3: THE DEFENSIVE DRAG (Lagging)

MOMENTUM FLASH CARD: STAPLES (XLP) & REAL ESTATE (XLRE)

  • RRG STATUS: DEEP LAGGING

  • PROFILE: Bearish Trend + Oversold.

  • QUARTERLY PULSE (Long Term): HIGH BEARISH / OVERSOLD.

    • Analysis: Heavy liquidation. The trends are broken.

  • TACTICAL MOMENTUM (Short/Med Term): WEAK.

    • Analysis: No sign of buyers stepping in yet.

  • THE PLAYBOOK:

    • Action: AVOID.

    • Strategy: "Oversold" implies a potential snap-back rally is possible, but it is high risk. The primary trend is down.

MOMENTUM FLASH CARD: CONSUMER DISCRETIONARY (XLY)

  • RRG STATUS: SLIDING (Neutral / Lagging)

  • PROFILE: Losing Momentum.

  • QUARTERLY PULSE (Long Term): NEUTRAL.

  • TACTICAL MOMENTUM (Short/Med Term): WEAK.

    • Analysis: This is a warning sign for the broader economy. While Tech rests, the consumer is weakening.

  • THE PLAYBOOK:

    • Action: REDUCE / WATCH.

    • Strategy: Caution. If the Long-term trend drops to "Weak," capitulate active positions.

QUADRANT 4: THE STABILIZERS (Center)

MOMENTUM FLASH CARD: FINANCIALS, ENERGY & INDUSTRIALS

  • RRG STATUS: CENTER / BENCHMARK HUGGERS

  • PROFILE: Flat.

  • QUARTERLY PULSE (Long Term): NEUTRAL to WEAK.

  • TACTICAL MOMENTUM (Short/Med Term): NEUTRAL.

    • Analysis: "Neutral" across the board (especially Financials). These sectors are providing no direction.

  • THE PLAYBOOK:

    • Action: MARKET WEIGHT.

    • Strategy: Ignore for now. Capital is better deployed in Communications (Long) or Cash (avoiding Real Estate).

MACROECONOMIC SIGNAL INTERPRETATION

Based on the data provided, specifically the rotation out of Defensive/Bond-Proxies (Utilities, Real Estate, Staples) and into "Value" Growth (Communications) and Defensive Growth (Healthcare), here is the signal interpretation.


This specific constellation of sector movements points toward a "No Landing" / "Higher-for-Longer" macroeconomic environment.


1. The "Higher-for-Longer" Interest Rate Signal

The most glaring signal in this report is the capitulation of the Real Estate (XLRE), Utilities (XLU), and Consumer Staples (XLP) sectors.

  • The Signal: These three sectors are "Bond Proxies"—they are heavily owned for their dividends. When they crash (High Bearish/Oversold), it is a classic signal that Bond Yields are rising (or expected to stay high).

  • Macro Takeaway: The market is pricing out aggressive interest rate cuts. Investors are terrified of duration risk. If a recession were imminent, investors would be buying Staples and Utilities for safety. The fact that they are dumping them suggests they do not fear a recession; they fear the Federal Reserve keeping rates high to fight sticky inflation.


2. The "Defensive Growth" Pivot

The rotation into Healthcare (XLV) is highly significant.

  • The Signal: Healthcare is a unique hybrid. It offers the safety of essential demand (people get sick in any economy) but often has better earnings growth than Utilities.

  • Macro Takeaway: This signals "Late Cycle" caution. Investors aren't panicking (or they'd buy gold/staples), but they are nervous about pure cyclical exposure. They want to stay invested in equities but prefer companies with reliable earnings that aren't dependent on a booming economy. It’s a move toward "Quality" over "Risk."


3. The Tech-to-Comms Handoff

The shift from Technology (XLK) (Weakening) to Communications (XLC) (Leading) suggests a search for Valuation.

  • The Signal: Tech led the rally, got expensive, and is now resting. Communications (home to Alphabet, Meta, Netflix, Disney) often trades at a lower multiple than pure Tech/Semiconductors.

  • Macro Takeaway: The "Risk-On" trade isn't dead; it's just becoming price-sensitive. This is healthy market behavior (rotation), implying that liquidity is still present but is hunting for better bargains within the Growth theme.


4. The Consumer Warning Light

The weakness in Consumer Discretionary (XLY) combined with the collapse in Consumer Staples (XLP) is a rare and bearish divergence for the US consumer.

  • The Signal: Usually, if Discretionary falls, Staples rise (flight to necessities). When both are weak relative to the SPY, it signals a broad distaste for the consumer theme.

  • Macro Takeaway: The market is betting that the US consumer is "tapped out." Inflation (hurting margins) and high credit costs (hurting spending power) may finally be biting. This is the biggest risk to the "Soft Landing" narrative.


Summary of the Macro Narrative

The report signals: "The economy is too strong to allow rate cuts (bearish for Real Estate/Utilities), but the consumer is starting to crack (bearish for Retail). Therefore, we will hide in high-quality Defensive Growth (Healthcare) and cheaper Tech proxies (Communications) until the picture clears."


Lester Davids

Senior Investment Analyst: Unum Capital

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