In yesterday's Sector Spotlight we took a look at the troubled tech sector. For those of you who don't get the Sector Spotlight, we can sum it up pretty briefly - the tech sector's recent fall under the 200 day line is a pretty bearish sell signal. We're going to wait for confirmation of that signal today, which is a second close under the 200 day line (and based on the current downward momentum, odds are that we'll get our confirmed signal). But in doing the research for yesterday's Sector Spotlight, we also saw a major shift in sector leadership. So, today we'd like to review the relative strength of the major sectors.
Some of you will probably recall this analysis - we do it every few months (whenever there's an actionable shift in sector strength). In a nutshell, the foundation in today's analysis is simply a comparison of the three-month price change with the six-month price change, on a sector-by-sector basis. However, the intent - as always - is to find the highest relative strength or the highest relative weakness. There are really only two possible verdicts using this type of framework. The first possibility is that the last three months worth of change is consistent with six month change. In this case, the trend is likely to be a long-term trend, and should be traded accordingly. The second possibility is that the three month price change moved in the opposite direction as the six month change. In this case, we're seeing a shift in momentum and relative strength. Although the three month change may be minimal, it may also mark the beginning of a new sector trend. The best part is, this idea can apply to short-term as well as long-term trades.
The results (below) of our analysis will clarify all of this. The sectors are ranked by their performance over the last three months (best to worst). The six month performance is listed in the other column. The lines in orange are the consistently problematic sectors. Here, the short-term trend flowed in the same direction is the bigger six month trend - both to the downside. The lines in yellow represent sectors that have a shot at a breakout soon. Although they may have done well recently, the bigger six month trend may only be positive because of gains in the last three months. The lines in green indicate consistent leaders. These are just industries that have had positive performance in the last three months inside an even more positive six month uptrend. That's a hint of sheer strength (this color scheme varies slightly from our November analysis). Take a look at the chart, then read on after that for our thoughts on each group.
Sector Relative Strength - ranked by three month performance
Consistent Leaders (green): Throughout a fairly turbulent couple of months, there are two sectors that have remained solid - capital goods, and basic materials. Neither really surprised us, and their joint strength points to a 'bigger picture' bullishness. When you think about it, those two sectors literally make up the building blocks of any industrial society. When the economy is thriving, factories are hard at work, and the raw materials suppliers are pretty busy keeping the factories full of steel, chemicals, or whatever 'ingredients' they may need. Well, corporate spending is still on the rise (so is consumer spending), GDP is still improving, and unemployment is still falling. But at the heart of it all is the production of physical products (bulldozers, bricks, etc.). It's far from glamorous when compared to fiber-optic broadband and camera-phones, but these companies are still generating earnings....and at a lot better pace than the tech names are. Proof? Boeing (BA) and French airplane maker Airbus are in bitter competition, but there's still enough new business for both to see drastically improving revenues (despite the fact that the airlines are up to their ears in losses).
The utilities sector is a bit of a surprise - especially the fact that it's the six-month leader. We attribute most of this to energy cost speculation and a little seasonal timing. We don't know if this sector can keep growing at that pace, although we're bullish on these stocks until we have a reason not to be. (That said, we were surprised utilities were leading the way in November too.)
Services and financials have been respectable, although not overly-impressive. We're very optimistic about services, although the financials could hit a brick wall if the stock market starts to stumble.
Potential Breakouts (yellow): The non-cyclicals have come on strong lately, as we featured in last week's Sector Spotlight. It makes sense. With most sectors getting thrashed early in this year after a lazy sideways drift in December of last year, the market started fleeing to the safety of consumer staples companies like Procter & Gamble (PG), Pepsico (PEP), and others. The same goes for healthcare - it's at least a stable stream of revenue. Humana (HUM) looks like the stock of choice this time around.
Consistent Laggards (orange): Lo and behold, technology is the sole troubled sector from the last time we did this relative strength table, verifying that this form of analysis 'works'. And as you read in yesterday's Sector Spotlight, it's not like there's a high probability of recovery here in the very near future.
So, that's it - a quick glance at what the near and possible not-so-near future holds. Are your holdings fighting the current trend, or are they aligned with it? It's been said that 50 percent of a stock's movement can be attributed to the sector it's in. Are you giving yourself every advantage to make gains, or are you going against the grain? We'll revisit this chart again when we see some significant changes.
Price Headley is the founder and chief analyst of BigTrends.com, which provides daily stock and options recommendations and education.
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