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May 5th, 2011 by

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 .

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