Chart of the Week: Sector Winners and Losers

While there was a lot going on in the sector space during the rally from October to April and the pullback earlier in the month, I have yet to see any sort of detailed explanation of what happened during these two periods.

This week’s chart of the week below attempts to bridge this gap, with a four-chart comparison of the bull move from October 4, 2011 to April 2, 2012 as well as the bear pullback from April 2 to April 10, 2012. The top two charts cover the bull move, with the left chart capturing absolute sector performance and the right chart capturing sector performance relative to the changes in the S&P 500 index as a whole. The bottom two charts also have absolute sector performance on the left and relative sector performance on the right, but this time during the April 2-10 pullback.

The absolute data show that all sectors moved up during the bull move and fell during the bear move. The relative data allow for a more nuanced analysis that shows financials (XLF) were the main engine behind the bull move and also the largest contributor to the pullback. While financials shared some of the credit with consumer discretionary stocks (XLY), industrials (XLI) and technology (XLK) on the way up, it was materials (XLB), energy (XLE) and industrials that helped to pull the broader index down. Only two sectors have outperformed the S&P 500 index on the way up and on the way down: technology and consumer discretionary stocks. Conversely, energy has been the only laggard in both directions.

While not reflected in these charts, in the three weeks since the April 10^th bottom, consumer discretionary, materials and industrials have been the biggest contributors to bullish moves. Interestingly, technology has now flipped to being the biggest drag on performance.

One could make a fairly good case that the ability of the S&P 500 index to make a run at 1500 (take a bow, James Altucher) will in large part be a function of the degree to which technology returns to a leadership role.

Related posts:

• Chart of the Week: Looking for Sector Leadership
• Chart of the Week: A Month of New Sector Leadership
• Chart of the Week: Four Key Sectors Struggle
• Three Pivotal Sectors: Financials; Homebuilders; and Consumer Discretionary
• Sector Performance in the Last Two Bull Moves
• Market 2.0
• August Sector Recap
• Bullish Case Losing Traction
• The Energy and Materials Rally
• Financials and Real Estate Power Yesterday’s Rally
• What Fell and What’s Bouncing
• What’s Working? A Sector Overview

[source(s): StockCharts.com]

Disclosure(s): long XLY at time of writing

Chart of the Week: Looking for Sector Leadership

Stocks have rallied impressively since the beginning of July, but during that period, that has not been a particular sector which has led the rally. The lack of strong sector leadership can be seen on the one hand as a potential impediment to further bullish moves, but also as a sign of broad-based support for stocks and a potential inhibitor to a correction.

In the chart of the week below, I show the performance of the nine AMEX sector SPDRs since the market’s July 2^nd lows. Note that materials (XLB) and industrials (XLI) have been the top two performing sectors during the past 2 ½ months, reflecting the relative strength in manufacturing. The other two sectors that have outperformed the SPX during this period, consumer discretionary (XLY) and technology (XLK), both showed signs of coming to life last week.

Going forward, materials and industrials can conceivably continue to lead a bull leg, but the rally will benefit substantially if one or more of the others sectors rises to meet the challenge. For now at least, my money is on technology to step up. That being said, the consumer and financial sectors cannot afford to be a significant drag on stocks or the current rally will likely run out of steam.

Related posts:

• Chart of the Week: A Month of New Sector Leadership
• Chart of the Week: Four Key Sectors Struggle
• Three Pivotal Sectors: Financials; Homebuilders; and Consumer Discretionary
• Sector Performance in the Last Two Bull Moves

[source: StockCharts.com]

Disclosure(s): none

Chart of the Week: A Month of New Sector Leadership

During the course of the past month or two, stocks have drifted sideways, lacking buying conviction and strong leadership.

In this week’s chart of the week below, I have tracked the performance of the nine AMEX sector SPDRs over the course of the past month. Note that former leaders financials (XLF) and energy (XLE) are now lagging, while defensive sectors such as utilities (XLU) and health care (XLV) are leading the way. Now I have nothing against utilities and health care, but the next time these two sectors lead a significant bull rally will be the first time in my memory. One or more of technology (XLK), consumer discretionary (XLY), materials (XLB) or perhaps financials needs to take a leadership role to give the next bullish leg the type of strength that portfolio managers can believe in.

A good defense may win championship, but it will not light a fire under potential buyers.

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: Four Key Sectors Struggle
• Three Pivotal Sectors: Financials; Homebuilders; and Consumer Discretionary
• Sector Performance in the Last Two Bull Moves

[source: StockCharts]

Disclosure: none

Chart of the Week: Two Bull Legs and Counting…

In the seven months since stocks bottomed and rallied some 61% (in the SPX) to current levels, there have been two distinct bull legs. The first leg began with the low close on March 9^th (or intraday low on March 6^th) and lasted just a little more than three months until the high close on June 11^th. After a one month downturn, the second bull leg was launched on July 10^th and persisted almost two and one half months until September 23^rd. This time the pullback appears to have been more short-lived and has a provisional end date of October 2^nd.

The three charts below – which collectively form this week's chart of the week – capture the sector performance relative to the SPX (the numbers are not in absolute terms) for the first two bull legs and also throws in the first week of what may turn out to be a third bull leg.

Note that in the first two bull legs, financials (XLF) were easily the top performing sector in both instances. Also, on both occasions it was the materials (XLB) and industrial (XLI) sectors that had clear separation from the rest of the sectors and were almost neck and neck for second and third. These three sectors clearly represent a top tier in terms of performance during the most pronounced 2009 bull moves. A second tier of consumer discretionary (XLY), technology (XLK) and energy stocks (XLE) has generally performed slightly above the baseline SPX. The bottom tier consists of three defensive sectors that typically only outperform the SPX in market downturns. In fact, these three sectors, health care (XLV), consumer staples (XLP) and utilities (XLU), were the top three performers during the June 11^th to July 10^th pullback.

Just for fun, I have added the last week of performance in the bottom chart. It is too early to draw conclusions for one week of upward movement, but so far the leading sector for October is energy. If the markets are to continue to set new highs for 2009, a big question will be whether the same sectors continue to lead or whether new leadership emerges. Personally, I do not expect that the same performance hierarchy that has characterized the last two bull legs to continue during the next month or two of upward moves. In fact, I would expect leadership to shift to the second tier in the form of technology, energy or consumer discretionary stocks. No matter what happens, it will be interesting to see how the broader market performs if financials start to lag the other sectors.

[source: StockCharts]

August Sector Recap

August was a month in which the S&P 500 largely drifted sideways, but there was a good deal going on in the various sectors that make up the index. The graphic below shows sector performance for the nine sector SPDRs for the first eight months of 2008 (bottom) and for the month August (top).

On the plus side, the turnaround in the consumer discretionary sector (XLY) is clearly responsible for much of the recent positive momentum in the SPX. Also worth noting is that four other sectors outperformed the index in August: consumer staples (XLP), health care (XLV), industrials (XLI), and technology (XLK).

As has often been the case during the past few months, when the SPX has been moving up, energy (XLE) and materials (XLB) have been moving in the opposite direction. In August, the financial sector (XLF) was also pulling the index in the wrong direction.

Watch the consumer for more clues about sector leadership and overall market strength in the month of September.

[source: StockCharts]

The VIX and Sectors: A One Day Snapshot

I collect a lot of strange and unusual data in the course of trying to be “Your One Stop VIX-Centric View of the Universe…” and it makes sense to share some of those chunks of data from time to time, even when I don’t think it will change the way anyone looks at the market.

Now that I’ve lowered your expectations, I call your attention to the graphic below, which captures the movements in the various sector SPDRs over the course of Monday to Tuesday, a day in which rumors of persistent difficulties at Lehman Brothers (LEH) helped to drag down the financial sector ETF (XLF) to its lowest level since March. The sectors are ordered with the highest weighted ETF at the top (XLK - technology) and the lowest weighted (XLU - utilities) at the bottom. With any luck, the balance of the graphic is self-explanatory.

From a sector and volatility perspective, I found a few interesting tidbits from the graphic. First of all, the change in the VIX and the change in the SPX implied volatility were almost identical, which is what you would expect. I did find it interesting that the VIX jumped more than twice the percentage change in the mean IV across the nine sector ETFs. Drilling down a little more, only three of the sectors had an increase in IV that was higher than the jump in the VIX -- and in each instance this was just barely the case.

I have highlighted in green the two sectors in which the price of the ETF increased at the same time that implied volatility increased. For the consumer discretionary sector (XLY), the change is not particularly dramatic, but for the materials sector (XLB), there is a substantial jump in IV on the heels of increasing price. Needless to say, this is unusual.

Part of the explanation for the large increase in the VIX (and SPX IV) relative to the individual sectors may come from the fact that the four most heavily weighted sector ETFs all had a substantial rise in IV, but even when taking this into consideration, the change in the VIX exceeds the change in the sum of the weighted parts.

Finally, for anyone who followed my fearogram and SPX-VIX correlation analysis last year, you may recall that the median daily percentage move in the VIX is -4.2x of the daily move in the SPX. For the record, yesterday the VIX moved 3.6x in the opposite direction of the SPX. In percentage terms, this is a fairly typical negative daily correlation number. [Disclosure: Long LEH at time of writing.]

The Energy and Materials Rally

While Google (GOOG), Caterpillar (CAT), and other big technology and industrial names have recently helped push stocks to their best levels in three months, the rally off of the March 20^th bottom may not have the kind of sector composition behind it that is conducive to an extended move. In fact, so far the bull run has been largely the result of strong performance in the energy and materials sector – a good portion of which can be attributed to the search for a hedge against inflation.

The chart below shows the performance of the nine AMEX Select Sector SPDRs relative to the S&P 500 index since the March 20^th bottom. The sectors normally associated with an economic turnaround – technology (XLK), industrials (XLI), and consumer discretionary (XLY) – have heretofore not been leading the charge. On the other hand, the leading sectors over the past month – energy (XLE) and materials (XLB) – are not the sectors that typically are able to lead a sustainable rally. In the next week or two, look for other sectors to start outperforming the energy and materials group. If this fails to happen, there will probably not be sufficient market breadth to keep the current rally alive.

What’s Working? A Sector Overview

Now that the broad indices have pulled back 10% or so and retraced about half of that drop, it is a good time to evaluate what is working in the current market environment.

One of the first places I look for clues is in sector and industry performance. With ETFs it is now possible to take the temperature of just about any micro-segment of the market you can think of, but for today I will stick to broader market segments.

Looking at the peak to trough from July 19 to August 16, you can see that it is the materials sector (XLB) that suffered the most dramatic losses, dragged down by WY, IP, AA and the like.

In the five days since the market has bounced, the materials have been leading the bullish charge, with energy and financials lagging. Given the change in expectations about interest rates, it is not surprising to also see that utilities have had a much better week relative to the past month than the other sectors.

Going forward, look at the relative performance of materials, industrials (XLI) and technology (XLK) to provide some clues about global economic conditions and consumer discretionary (XLY) vs. consumer staples (XLP) to tell us something about the health of the consumer. If energy (XLE) and financials (XLF) can also start to rally, this may help us to discern the difference between a short-term bounce and the resumption of the bull market.