May 17th, 2011

Industry Rotation Among S&P 500 Industry Groups

I don’t know what’s happening to the market or how long it will go on but there is a weird transition happening. Others had talked about for a number of days so I had to see for myself and, lo and behold, it turns out to be true.

Scroll through the charts of the S&P 500 stocks for yourselves, as I did, and you’ll find it hitting you right in the face. The thing that’s happening is that there seem to be only three group of stocks recently moving ahead while the rest of the market seems to have hit a stone wall and have fallen back. You can look at a long-term stock chart and, before looking at the stocks symbol can correctly guess the industry group about an 70% of the time. There’s such a divergence between the groups and such a similarity between the stocks within a group.

The groups moving ahead (big time) are:

  • healthcare related like biotech and drugs, equipment, services and health plans, drug wholesalers and retails
  • consumer staples like cosmetics, personal care, soft drinks, tobacco, grocery wholesalers and retailers, etc.
  • utilities including electrical, natural gas, etc.

Several other groups have actually formed top reversal patterns and are headed south, like oil & gas. The rest of the stocks are at or marginally above long-term resistance levels at either the 2006 or 2000 highs. Most notable among these are the financials including banks, insurance and asset management companies.

Lost in the shuffle are tech, defense, industrial equipment, construction and most retail stocks. Most of the large-cap techs are retreating (MSFT, TXN, BRCM, INTC, QCOM) while the small-tech software, equipment and Internet stocks seem to be deciding in which direction they’ll fall.

What does this survey mean for you; how can you use subjective evaluation like this? I’ll tell you what it means for me. It means that I’m going to reconsider the investment strategy I’ve been following since last November when the “mid-term election cycle” started. Interestingly, the S&P has already done that when viewed on an equal-weighted basis rather as contrasted with the traditional capital-weighted basis.

I’ve been looking for a move to around the previous all-time high on the S&P by year-end with a interim consolidation at around 1325, around the market’s level. Many “talking heads” started calling for the double dip recession which could be forcing a move by the herd towards the safer, low growth, dividend paying stocks… least through the summer.

I already have over 20% in health care related stocks and have dumped my energy and precious metals stocks. Should I follow the herd and now also abandon the tech stocks now representing another 20% of the portfolio? How long will this stock rotation phase last and where will it go to next [my guess is back to the long-dormant but waiting-for-a-pop financials]? Tough calls but one that has to be made in order to stay even with the herd.

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  • Anonymous

    50 ma 1323 hit , you are ggod.. let 's see if we bounce here

  • Anonymous

    50 SMA(1325) or 200 SMA(1234)?

    Nobody really knows how computer going to react??

  • Douglas

    You are a strong advocate of chart patterns and have pointed to numerous inverted head and shoulders during the two year run up. Your ceiling numbers from these patterns have been fairly accurate. What percentage fall is expected now that we have a failed inverted head and shoulder?

  • Joe

    Douglas, I'm not sure what you mean by "failed inverted head and shoulder". If you're referring to the one from last May-Aug, I consider it successful since market rose 20% above that neckline.

    What you should be focusing at now are the possibility of one of two inverted head and shoulders now in very preliminary formative stages (I've posted an image on the Facebook link to the right).

    The market dropping down to 1300 increases the possibility of the smaller IHS while a decline to 1250 increases the chances of the larger.

    In either case, as a bull, I'm hope the 50-dma support is strong enough to foreclose either of these possibilities.

  • Douglas


    I guess this just shows how personal biases can change which patterns are evident to individual technicians. You are a confirmed bull. In a previous post you described pattern symmetry to justify a consolidation in the 1400 range of the S&P and you believe that the IHS that formed between Feb 22 & Apr 25 is still in the confirmation stage. I am a confirmed bear (at least in the short run), and I see a rising wedge in your symmetry chart and a downward piercing of the IHS neckline at the beginning of May on increased volume relative to the rising formation of the right shoulder. I would imagine that your upward bias is due to a number of technical factors, such as 50DMA, lunar phases (1368 target) and stock rotation (the fall in tech & materials and rise in industrials & capital goods suggests middle to late bull). My downward bias is due to fundementals, such as the end of fed policy driving the recent bull run, China tightening, Housing double-dip, and worldwide auterity measures that will dampen consumer demand. I must admit that my bearish calls are typically early (1999 dot-com bubble, 2006 Housing bubble, and 2010 fed-induced bubble), so the 10 – 20% correction I have been anticipating might still be 6 mo to 1 year down the road. I have yet to sell into my bearish calls, but I have dampened buying. I was just asking your thoughts on how low markets tend to go if IHS patterns do indeed fail. Thanks.

  • Joe

    This difference of opinion is what makes a market, Douglas. I actually don't think we're that far apart. The only real question is what to do between today and somewhere off in the future when your foresight may actually come to pass.

    The market may advance another 7-10% to 1450 in the meanwhile and, if you had acted on your early call you would have missed out on that opportunity (a true opportunity cost).

    Rather than predicting an outcome that will likely happen sometime out in the future, I'd rather do what's best now and be ready to react when necessary. I'd rather take a loss during the time it takes to react than lose the profit waiting for that time to come.

  • Douglas


    I see your point. Thanks for your insight.