On Monday of this week, the S&P 500 passed a major milestone, moving past 2000 en route to a peak of 2001.95. Granted, it didn’t close above the 2000 mark, and there’s even a good chance the brush of 2000 could end up sparking a wave of profit-taking that would send the S&P 500 and the SPDR S&P 500 ETF (SPY) — aka the SPY ETF — into a selloff.
Yet, barring the unlikely beginning of a bear market, Monday’s move ultimately will prove to be a bigger-picture victory for the S&P 500 and the broad market as a whole.
However, that victory and its underlying momentum haven’t been distributed evenly among all the major stock sectors. You can thank a few leading industries for carrying the S&P 500 above 2000, while other sectors have been nothing but dead weight.
More important right now, the most likely leading and lagging sectors for the last third of the year are starting to emerge. Traders can buy the SPY ETF and simply enjoy a market-average return. Or, they can focus on the better arenas while steering clear of the weaker ones, and maybe squeeze a little extra gain out of the market to finish up the year.
Not that past performance is perfectly predictive of future results, but the past can tell you a great deal about what to expect and what’s plausible in the foreseeable future.
To that end, the chart below plots the performances of all the major sector ETFs since the last major low on Feb. 3. While recent leadership relative to the S&P 500 or the SPY ETF is bullish, there’s such a thing as unsustainable strength. Conversely, being at the bottom of the performance pile isn’t always a great sign, but it is much easier to rally from a low than it is to keep rallying from a high.
The key lies in figuring out how the performance trends are currently changing, then getting out in front of those changes.
With that in mind, this is where things have been, and where they seem to be going.
Poised to Lag the S&P 500
Although six of the 10 major market sectors have underperformed the SPY ETF since early February, only one of those six is apt to be a real problem moving forward … telecom (IYZ). It’s at the bottom of the barrel for the last six months, and has suspiciously not participated in the bounce since the low from Aug. 6.
The basic materials sector (IYM) has actually helped lead the charge since early February, but that has mostly been on the heels of the revival of gold mining stocks.
Gold’s (GLD) not in the best of situations right now, however, so basic materials stocks might well be on the verge of weakness again.
Poised to Lead the S&P 500
Healthcare has been relatively weak through early August, probably due to concerns of tepid earnings growth for the second quarter. The sector’s profit growth hasn’t been all that of late (single digits for the past few quarters before Q2), and it was unclear whether the advent of Obamacare was good or bad for the group.
The dust is now settling on the issue though, and with healthcare’s largest stocks seeing a whopping 16.5% jump in year over year income for Q2 and more double-digit growth expected in the coming quarters, investors have good reason to fall in love with these names again.
While financials have been lackluster of late — thanks to equally lackluster earnings growth — the doubters might have overdone it during the past few months. They seem to have caught their mistake, however, as the financial sector’s stocks have rallied much faster than most other sectors since the Aug. 6 bottom.
Last but not least, although the technology sector didn’t do all that well Monday, historically speaking, the fourth quarter (even though it doesn’t start for another month) is a good one for technology stocks. Granted, telecom statistically outperforms technology in Q4, but telecom isn’t entering this particular fourth quarter well-positioned.
The Last Word About S&P 2000
This bigger-picture road map might explain how the S&P 500 and/or the SPY ETF could finish the year on a high note: above 2000. The relative performance, however, doesn’t change the fact that there’s going to be a violent battle between the bulls and the bears now that push has come to shove at a pivotal mark.
Just keep your time frame in perspective — or, in other words, don’t let a correction in September distract you from these larger undertows.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.