Bear Indication

Last week I talked about that this year is going to bring more uncertainty than we expect or want, and in my opinion, more to the downside. Well it started already.

The short respite in the market due to us getting rid of the ten plus year menace did not last long. The month to date (MTD) return on the comprehensive S&P 500 index is actually negative 1.19%.

So now I want to look at which sectors I should to invest right now. I always want to invest in sectors rather than stocks, because appropriate sector selection and allocation is key to prudent investing. It is better to invest in sectors, rather than stocks, because sectors provide a better risk return profile. Sectors are inherently diversified, very liquid and you avoid individual company risk. So let’s look at the recent sector performance and analyze where the money is going.

If you look at the returns to date since the beginning of last year, it is easy to see that sectors that associated with a growing economy such as Industrials,  Consumer Discretionary, Energy handsomely outperformed the market, as measured by the Excess Return over the S&P 500 ETF benchmark.

 

Ticker	Sector	1/1/10 to Date Return	Excess Return over SPY
XLI	Industrials	39.16%	15.76%
XLY	Consumer Discretionary	37.73%	14.34%
XLE	Energy	35.68%	12.29%
XLB	Materials	24.10%	0.71%
XLP	Consumer Staples	22.86%	-0.53%
XLK	Technology	17.51%	-5.88%
XLV	Healthcare	16.48%	-6.91%
XLF	Financials	13.96%	-9.43%
XLU	Utilities	12.14%	-11.25%
SPY	S&P 500 ETF	23.39%	0.00%

Source: The Rockledge Group

 

But let’s look at the most recent sector rotation and measure sector performance year to date.

 

Ticker	Sector	1/1/11 to Date Return	Excess Return over SPY
XLV	Healthcare	13.13%	5.45%
XLE	Energy	11.81%	4.12%
XLI	Industrials	9.22%	1.53%
XLP	Consumer Staples	8.44%	0.76%
XLY	Consumer Discretionary	8.26%	0.58%
XLU	Utilities	7.44%	-0.24%
XLK	Technology	5.81%	-1.87%
XLB	Materials	3.19%	-4.50%
XLF	Financials	2.07%	-5.61%
SPY	S&P 500 ETF	7.68%	0.00%

 

We see that our growth sectors such as Industrials and Consumer Discretionary are beginning to lose steam, while Healthcare sector started to show growth. The picture is becoming even more telling if you look at the month to date numbers.

 

Ticker	Sector	Month to Date Return	Excess Return over SPY
XLV	Healthcare	0.68%	1.85%
XLU	Utilities	0.54%	1.72%
XLP	Consumer Staples	0.25%	1.43%
XLY	Consumer Discretionary	-0.44%	0.73%
XLK	Technology	-0.64%	0.54%
XLF	Financials	-0.85%	0.32%
XLI	Industrials	-2.02%	-0.84%
XLB	Materials	-3.35%	-2.18%
XLE	Energy	-5.50%	-4.33%
SPY	S&P 500 ETF	-1.17%	0.00%

 

It is pretty clear that the market is rotating towards the defensive sectors, such as Healthcare, Utilities and Consumer Staples are beginning to shine, while the market is rotating out of the growth sectors such as Energy, Materials and Industrials.

where does a prudent, risk averse investor go now? My suggestion is to look at the defensive sectors such as Consumer Staples, Healthcare and Utilities, as represented by the SPDRs ETFs XLP, XLV and XLU.

Position disclaimer: Client portfolios hold positions in all of the above mentioned ETFs .