February 9th, 2012 by

A Study in Sector Allocation

We are having a very good time now. The S&P 500 is up 4.4% in January and 2.9% going into Wednesday, for a cumulative return of 7.4% year to date. So, yes, it is turning out to be a very good run. What a difference from the virtually zero gain on the S&P 500 for all of last year.

Last year was nerve-racking for sure, with so many macro and geopolitical events coming one after the other — the onslaught was relentless. It’s no wonder that defensive sectors ruled the day.

The picture today is quite different. All the defensive stocks are at the bottom of the list. In fact, the sectors are almost completely reversed.

It didn’t take long for the markets to do a complete 180. This month, the individual sector performance looks similar.

This is very much in line with our Rockledge SectorSAM model, which, through fundamental analysis of all S&P 500 stocks, aggregates individual company valuations into the top S&P 500 economic sector valuations. The following February ranking is based on this fundamental research.

Some of the picks make intuitive sense right away. Let’s look at the last year’s top performers first.

The utilities, healthcare and consumer staples sectors had significant outperformance gains due to global and domestic macro and geopolitical instability. All three are defensive sectors. The new year started on a more optimistic note, and there is less fear, so these sectors are underperforming the market.

The consumer discretionary sector is suffering the post-Christmas and holiday hangover effect. Spending is less and will most likely stay that way until more people are employed.

The materials and financial sectors were top performers in January, but the materials sector has run out of steam. Although the economy seems to be moving in the right direction, this sector has realized its gains, as measured relative to the S&P 500.

The financial sector is still going strong despite uncertainty in Greece. The continued strength of the sector is due to the improving health of domestic financial institutions and the fact that the situation in Greece, although serious, has been mostly priced in the market already.

The technology sector is continuing its strength due to companies loosening their budgets and catching up with several years of underinvesting in technology.

The energy sector’s good performance is owed to an unusually cold winter in most of the U.S., except for the East Coast, as well as continued tension in the Middle East.

The industrial sector, similarly to the materials sector, was a strong performer in January, but it has slowed down a slowly improving economy.

February is still young, but for the rest of the month, based on our SectorSAM analysis, I don’t foresee any significant changes to the current sector allocation today or for the next several weeks. Steady as she goes.


At the time of publication, Gurvich was long XLB, XLE and XLK; and short SPY, XLF, XLI, XLP, XLU, XLV and XLY.

Category: Sector Rotation



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