I plotted the performance of a couple exchange traded funds that track major sectors in the market.
I started with the S&P 500 ETF (NYSEARCA:SPY), then I had Energy Select Sector SPDR (NYSEARCA:XLE), Financial Select Sector SPDR (NYSEARCA:XLF), the Healthcare Select Sector SPDR (NYSEARCA:SLV), the Industrial Select Sector SPDR (NYSEARCA:XLI), the Materials Select Sector SPDR (NYSEARCA:XLB), the Technology Select Sector SPDR (NYSEARCA:XLK) and the Utilities Select Sector SPDR (NYSEARCA:XLU).
When we plot all of these on a comparison chart together, like I show you in the video, starting from the uptick in the market that happened on Nov. 16, 2012, we can see via the daily chart of the Dow that it has been establishing all-time highs in recent trading days. It was on March 16 that we saw the turnaround, and we’ve seen things moving higher.
In that time, we’ve had two consolidation periods that I show you on the chart. You can see those clearly outlined in the comparison chart where we’ve had a fairly strong uptrend, but then the two consolidation ranges, one right before the end of the year as everyone was wondering what would happen with the fiscal cliff negotiations, and then the second one more recently.
You can see in the pullbacks that all of the sectors have fallen into lock-step with each other and moved down all together. There hasn’t been one of these sectors that has been able to withstand the negative turns in the market. We have had a couple of sectors, for example technology, lead up into the new year’s pullback, and then materials since new year’s and the most recent pullback was able to out-perform the market a little bit. And utilities slid off just a little bit, but that happened mostly at the beginning of the year and they picked up speed and were really able to catch up with the rest of the market.
Other than that, everything has been moving in lockstep with each other in this stair-step fashion as we’ve been moving up in the uptrend. What does that tell us as we see this happening in the stock market?
It tells us that diversification isn’t making a huge difference, especially if we look at it from a broad diversification standpoint of looking at individual sectors. Now, if you were to drill down in and look at individual stocks, yes, you are certainly going to find some stocks that have strong out-performers and some stocks that have been disappointing under-performers. But, as we look at the market in general, everything has been moving in the same direction.
That tells us during the downturns we’re going to see most of the market – of course, again, there will be a few standouts that may not turn down – but we’ll see the restaurant of the market move down. And, if the market is moving up, like it is right now, most of the stocks out there are going to be moving up.
So, one of the things that we’re focusing on at SlingShot Trader is trying to identify some of those stocks that are going to move up nicely and even out-perform the moves higher, but we’re also looking for some of the stocks that may have gotten a little too high, a little too overbought and may be coming down around some of these news announcements.
We talk about one of those bearish trades here.
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