Sector Performance Since August Lows

The number “88″ means a lot of different things to different people around the world. For some, it expresses the notion that the universe is both infinitely large and infinitely small. Others see it as a message of eternal love. Meanwhile, Chinese culture recognizes “8″ as its luckiest number, with “88″ symbolizing even greater fortunes.

However, 8/8 is a rather dismal date for the investing public. Investors in U.S. stocks will remember it as the ugliest finish to a trading session in 2011. (At least so far.)

Granted, there were several occasions in August when the S&P 500 tested its lowest closing price, including 8/10, 8/19 and 8/22. As of now, though, 8/8 is the bottom of the calendar year barrel.

For the time being, the sovereign debt crisis in Europe appears to hold the keys to stock market fortunes or misfortunes. Nevertheless, it is worth taking a look at how the different U.S. economic segments are faring since the lowest ebb.

Sector ETFs: Performers and Non-Performers Since 8/8
					% Gain		Approx % Off 2011 High
NON-CYCLICALS
Utilities Select Sector SPDR (XLU)					10.3%		-1.9%
iShares Dow Jones Telecom (IYZ)					7.5%		-16.6%
Health Care Select Sector SPDR (XLV)					7.4%		-10.7%
Consumer Staples Select SPDR (XLP)					4.7%		-6.8%
CYCLICALS
Consumer Discretion Select SPDR (XLY)					6.5%		-12.6%
Materials Select Sector SPDR (XLB)					5.3%		-18.1%
Energy Select Sector SPDR (XLE)					5.0%		-18.4%
Industrials Select Sector SPDR (XLI)					4.7%		-20.0%
Technology Select Sector SPDR (XLK)					4.7%		-11.1%
Financials Select Sector SPDR (XLF)					2.4%		-26.7%
S&P 500 SPDR Trust (SPY)					4.9%		-13.3%

 

It should come as no surprise that economically sensitive, cyclical sectors are further from their 2011 bull market highs than less sensitive, non-cyclical segments. Indeed, most corrections and bears begin with relative strength from the non-cyclicals.

On the other hand, it is somewhat surprising to discover that 3 out of 4 non-cyclical sectors have risen more off the August 8 lows than the rest of the cyclical segments. You simply don’t/won’t get genuine bullishness when late economic cycle “faves” like utilities and health care receive the lion’s share of capital appreciation.

In addition, it is particularly troublesome to have the lowest-beta sector in SPDR Select Utilities (XLU) performing the best, while the highest-beta sector in SPDR Select Financials (XLF) has the weakest performance. One simply can’t put much faith in any rally off the August lows until this dynamic changes.

Taking “stock” of all ten segments, we see that XLF as well as SPDR Select Industrials (XLI) have already hit bear market percentages. In contrast, XLU and SPDR Consumer Staples (XLP) are the only 2 segments that are less than 10% off bull market highs.

It is true that any combination of factors could spark a sustainable rally. Germany/France/Finland could make some headway in their handling of weaker euro-zone members. U.S. corporations could hire far more than markets expect. China might declare victory in its battle against inflation. October earnings could blow away expectations. And investors might actually recognize the reality that corporate dividends from thriving corporations deserve more attention than downgraded, lower-yielding 10-year treasuries.

That said, I still recommend a lighter-than-normal allocation to equities. And if you’re planning to wade into the deep end, don’t forget your life jacket — stop-limit loss orders on those “riskier” positions.