It is known from the sector rotation textbooks that the late economic expansion is usually attributed by the energy sector outperforming the rest of the market. The same textbooks are also saying that the early contraction phase means the demise of energy stocks and rotation into consumer staples.

Let see what happened. The energy stocks are down over 4% today and 8% off the last week top.

At the same time the consumer staples funds are flat today and only 2% off the last week top, outperforming all major indices. The previous breakdown of the XLE/XLP ratio happened in early August, about 10 days before the short-term market bottom. I think if the pattern repeats itself we may have a selling climax 10 days from now. I think two breakdowns in three months is enough to signal a new trend.

Here’s the chart:

xle xlp

To me this ratio looks quite tired and looks like a major topping pattern. When it turns down the economy will be already in contraction. The exact timing is not very scientific, it is possible that the economy is already contracting or haqs just few weeks of growth left.