After six consecutive weeks of pushing higher and higher, it appears as though the slow and steady rally in the markets has pushed the pause button. Stocks in the Dow were up nearly 8% from the June 4 low through the close on Aug. 22; however, a 100-plus point sell-off on Thursday is making the bulls leery of a continued run higher.
If stocks tank from here — and that’s always a big if — then the most vulnerable sectors out there likely would be those that have enjoyed the biggest runs higher so far this year.
The theory here is that if investors think the bull is broken — whether because of lack of more stimulus from the Fed, failure to resolve Europe’s debt issues, the impending “fiscal cliff” worries, downbeat economic data or slowing corporate earnings, etc. — then these sectors would like become the first casualty of profit-takers looking to lock in gains and hide out in cash or other safe-haven assets.
To see where the best performance has been so far this year, I ran a Bloomberg screen of the top-performing, single-beta domestic ETFs year-to-date in 2012. Foremost among those top gainers will, I suspect, be a surprise to many — it was the iShares Dow Jones US Home Construction (NYSE:ITB) fund, which has posted nearly 50% returns year-to-date.
ITB counts homebuilding stocks such as DR Horton (NYSE:DHI), Lennar Corp. (NYSE:LEN) and Toll Brothers (NYSE:TOL) among its top holdings. These stocks are up huge so far this year, as investors buy into the real estate comeback rally. But if the bullish train slides off the rails, it likely won’t be long before investors bank profits in homebuilders.
Another sector fund that has posted stellar returns so far in 2012 is the Market Vectors Biotech ETF (NYSE:BBH). Holdings in BBH read as a who’s who of the sector, with marquee names such as Amgen (NASDAQ:AMGN), Gilead Sciences (NASDAQ:GILD), Biogen Idec (NASDAQ:BIIB) and Celgene (NASDAQ:CELG) atop the list of holdings. This fund has soared more than 36% year-to-date, but if the current rally fizzles, investors could start to pull the plug on biotech.
Click to Enlarge Still another top-performing market segment that could feel the burn from the return of a bearish mind-set is one of the largest and most widely held of all ETFs. It is the PowerShares QQQ (NASDAQ:QQQ), a fund pegged to the Nasdaq-100 Index, which holds some of the biggest — and in my opinion, best — stocks the market has to offer.
So far this year, investors have bid up the QQQ some 22% — an outstanding showing when compared to the Dow, which is up about 6% in 2012, and the S&P 500, up approximately 12%.
Here we are talking about profit-machine companies such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), Oracle (NASDAQ:ORCL) and Intel (NASDAQ:INTC). Many of the Q’s top holdings are having banner years, but if investors begin to run scared, money is going to come off the table from many of these widely held, standout performers.
Being that the market is a forward-looking mechanism, the prognosis for all three of these sectors is robust. However, we all know how fickle markets can be, especially during the past couple of years.
If the current market milieu moves from optimism to pessimism — i.e., from bull to bear — then these outstanding sectors likely will come under fire. That’s when you’ll want to take at least some of your winnings off the table and go home.
As of this writing, Jim Woods was long QQQ.