S&P500 Sectors Bullish-Bearish Ranking

July 18, 2010

The S&P 500 is definitely in a down trend at the moment (down 3.90% YTD and down 4.54% in the past month). All of the sectors are down too, but Consumer Staples, Utilities and Telecoms are down the least in the past month, and show a majority of their constituent companies to be in bullish Point & Figure chart patterns.

The short-term superior price performance of those three sectors in combination with the superior P&F Bullish Percent, as well as having the three highest trailing yields; suggests that for those who are not on the sidelines with cash and who have a low tolerance for loss, may best overweight those three sectors while the broad market it declining.

The difference between the Bullish Percent for the sectors and the overall index is not explained. It could be one of those "data things", or it could be the result of using weights for the actual index while using Bullish Percent for the proxy funds; or it could be the result of using the Vanguard proxies for InfoTech and Telecoms, which track MSCI sector indexes. We doubt the data discrepancies are material to our conclusions.

In the short-term, the Bullish Percent indicator suggests that Staples, Utilities and Telecoms will be the strongest, while Cyclicals, Industrials and Materials will be the weakest. Unfortunately, that indicator is not market-cap weighted, as is the index, but it is probably still useful in combination with other factors. Defensive logic also would tend to suggest those sector relativities.

On balance, however, we prefer to be substantially out of the market at this time, and until the broad market returns to an upward trend. We have begun to accumulate small positions in certain special high yield equity situations, but are overwhelmingly in cash with respect to our normal equity allocation.

Our point of view is summed up well by a recent post by Schwab:

Schwab Sector Views: Patience an Overlooked Virtue? (July 15, 2010)

"Schwab Sector Views reflect a three- to six-month outlook and are appropriate for investors looking for tactical ideas. We typically update our views every two weeks. As uncertainty continues to swirl in the global investing environment and both the bulls and bears make convincing arguments, the urge to act boldly can be overwhelming. Lots of things are happening—you have to do something, don't you? Not necessarily. Sometimes the boldest move an investor can make is to be patient—not always top of mind for investors who like to dabble with tactical sector allocations. However, when clarity is lacking and the economy is in transition—both of which appear true at the moment—it can pay to sit tight until the haze diminishes."

Schwab, however, sees Information Technology and Healthcare as the outperformers. They may well be right, particularly over the 3-6 month time frame they use. Our view on the outperformance of Staples, Utilities and Telecoms is for the immediate short-term and extending so long, and only so long, as the broad market is in decline.

Holdings Disclosure: As of July 18, 2010, we do not own any securities mentioned in this article in any managed accounts.

Disclaimer: Opinions expressed in this material and our disclosed positions are as of July 18, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.