Tuesday, October 22, 2013

Is Sector Leadership Changing?

With the S&P 500 recently hitting a new high, I thought it was interesting that none of the nine major sector SPDRs had yet to register a new relative high.

The charts below show the S&P 500 in the upper-most left corner with the relative performance of the nine sectors to follow.

The tech sector (XLK) has come close to hitting a new relative high but is not quite there yet. And the healthcare sector (XLV) did hit a new relative high last week but has since pulled back. 

I don't wish to make too much of this because it's likely a temporal occurrence with one or more of these sector ETFs likely to make new highs vs. the S&P 500 in the near future. Also, these SPDRs are cap-weighted meaning just a few stocks could be overly-influencing the return for the entire sector. However, I did find it a bit odd that at least one of the ETFs is not currently at a new relative high. 

There's a good chance this lack of clear sector leadership over the last few days could indicate that dynamics are changing and that perhaps new sectors and industry groups will soon emerge as market leaders. To get a better sense of what may be forthcoming in this regard, below are charts of twelve-month relative performance for the Guggenheim major sector ETFs. Unlike the SPDRs, these ETFs have equal-weighted constituents, not cap-weighted. As I've written in the past, I believe equal-weight ETFs offer a more accurate representation of sector performance.

  • Consumer Discretionary and Energy look to be approximate mirror-opposites. Discretionary stocks hit a ceiling over the last several weeks as returns generally just matched that of the equal-weighted S&P 500 (RSP), only to then have relative performance fall off a cliff this month, breaking the uptrend. In contrast, the relative performance for the Energy sector (RYE) appears to have put in a double-bottom this year and successfully broke through a downtrend in August. In fact, energy stocks have been stellar outperformers this month.
  • Materials appear to have established a relative bottom during the summer and if anything an inverse head-and-shoulders formation is developing (bullish).
  • Technology has pulled back within an uptrend, still looks good.
  • Industrials double-bottomed this year and made a nice relative-price run in August-September, only to abruptly and somewhat severely retrench from mid-September through this month. 
  • Relative performance for Financials broke down in July-August, slid further in September, and are enjoying a reprieve bounce this month.
  • Healthcare remains in a healthy uptrend.
  • Utilities and Consumer Staples (the risk-off contingent) remain in well-defined downtrends.
In summary, there are signs of rotation out of Consumer Discretionary and Industrials and into Energy and even Materials. To some extent, this is evidence of investors exiting early-cycle sectors and gravitating to mid- to late-cycle sectors. Nothing to necessarily worry about and if anything indicates normal maturation and progression of a bull market. I'm not convinced that the spike in relative performance for Financials will have legs given the preceding plunge did damage and the sector now faces overhead relative resistance. And as with Consumer Discretionary and Industrials, Financials tend to be an early-cycle sector, offering further hints that money is being reallocated out of these sectors. 

At this point, I would prefer to focus on Energy stocks in particular, but also Tech, Healthcare and even Materials (selectively). Consumer Discretionary and Industrials are not "broken" sectors and I will keep an eye on them for resumption of uptrends, however at the moment they've become relative laggards and thus potential sources of funds. Needless to say, Utilities and Consumer Staples remain sectors to avoid or underweight.

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