While there are nearly as many ways to slice and dice the stock market as there are analysts on Wall Street, one of the best is still the simplest. The 10 Select Sector SPDR exchange-traded funds break the market down into digestible chunks with just enough granularity to point out opportunities.
It is no surprise that technology led the pack for much of this year and the Technology Select Sector SPDR Fund (NYSEARCA:XLK) is still up 22.6% year-to-date vs. 13.4% for the S&P 500 Index. However, despite setting new all-time highs throughout September and so far in October, it actually underperformed the market since late August.
Since the broad market itself continues to set record after record, other sectors must have taken over the mantle of leadership and indeed we can use these ETFs to prove it.
Let’s take the late August peak in relative performance of the tech sector as our starting point. The top group since then is energy and the Energy Select Sector SPDR Fund (NYSEARCA:XLE) beat the market by about 7%.
Click to Enlarge This ETF peaked last December and suffered a private bear market by falling roughly 20% to its low this past August. As we can see in the chart, it broke out in September through its falling trendline and the new trend does look established to the upside.
Since oil itself does not appear to have a similar bullish stance and it more likely rangebound, the conclusion is that money fled the arguably overvalued tech stocks and moved into sectors deemed as “value.”
Indeed, energy’s low price relative to the rest of the market is one reason and now that the technicals have turned for the better we can see how money would continue to flow in here.
A rather beefy 3.1% dividend yield for the ETF is a bonus.
The next top sector ETF is Financial Select Sector SPDR Fund (NYSEARCA:XLF) led by the banks. Insurance stocks were hammered in the aftermath of Hurricane Harvey in Texas and Louisiana and banks fall in sympathy. In fact, some measures of the banking industry actually scored technical breakdowns in early September.
Click to EnlargeHowever, the bulls quickly recovered and sent banks and the entire financial sector higher. The rally was steep. It took the financial ETF to new highs and to the top of the performance ranks.
The fundamentals back this up as interest rates finally responded to the Fed’s promise to unwind the liquidity plan it began after the financial crisis in 2008. More importantly, the yield curve, which in its simplest form measured the difference between long-term and short-term Treasury rates, also steepened a bit.
This is a critical component for banking profits as they borrow at low short-term rates and lend at higher long-term rates. Banks certainly like a steeper curve and their stocks respond in kind.
That brings us to the bottom performers. While technology fell from the top of the leader board, it is still very much in the game. The bottom sector right now is consumer staples followed by utilities.
Both consumer groups – staples and discretionary – lagged the market for months but something changed in late August. Tech stumbled and utilities fell apart to take over the second worst performance spot.