Sector Rotation Waving a Small Red Flag… So Far

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May 1, 2010

Nothing was all that dramatic last week on the sector front in terms of total gains or losses. Yet, it was a huge week in terms of the paradigm shift we saw unfold. How so? It’s just that the market’s biggest habitual losers suddenly because the biggest winner (relatively), and the market’s strongest sectors of late suddenly became the biggest losers.

How did this happen? It could be - and likely is - a case where investors are starting to see the writing on the wall, and looking to replace riskier and aggressive names with safer and conservative, ‘defensive’ stocks. Telecom, gold, healthcare, and utilities certainly fit the bill.

It’s still a little early to say for sure, but it’s an interesting change in dynamics. One week could be a confidence; two weeks of the same is apt to be the beginning of a trend. So, let’s revisit the data again next week. If this truly is a developing trend, it should be trade-worthy.

Sector Performance

Sector Rank - May 2nd, 2010

And just to put a visual spin on the performance data, here’s the long-term (since early March of 2009) percentage-return comparison of all the major sectors.

Sector Percentage Return Comparisons (since 03/09/09)

Sector Comparison - May 2nd, 2010

Industry Performance

Just to identify precisely where the weakness and strength was on the sector front, we can break it down into individual industries. The odd part about last week - and this is a rarity - is how the leading and lagging industries don’t coincide very well with the leading and lagging sectors.

Part of the mismatch is a testament to last week’s sheer volatility… which is the one caveat to this week’s relative strength analysis. Regardless, investors need to see a little more definition than this before committing capital. Again, the coming week’s data should provide that clarity.

Industry Performance

Industry Rank - May 2nd, 2010

In the bigger picture, if the ‘flight to safety’ really is what’s being displayed in these numbers, then investors should indeed be concerned enough to (1) take notice, and (2) do something about it. Whether a drawn-out correction is merited or not, these clues suggest most investors are planning for one. It may only be a self-fulfilling prophecy, but that doesn’t mean it can’t harm portfolios of those who ignore the signs.

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