Wednesday, December 12, 2012

Market Gyrations Creating Value and Opportunity

The last few months of the stock market has been very interesting. The S&P 500 is basically right back where it was in August, 3-4 months ago, around 1400. It's gone as high as 1470s, and fallen as low as 1340s during this period. That is about 130 points, or roughly 10%, around its mid point. It's been one heck of a roller coaster ride

A quick glance at the market might not reveal any interesting opportunities, as we're basically 5% from the highs, and we've been taught to wait for pull backs to buy, right? But it is important to remember the market index is made up of many sectors, and each sector contains many stocks, and all together they make up the index. What have the underlying components of the S&P 500 been doing lately? Let's take a look.

XLF - Financial Sector SPDR ETF

August 1, 2012: 14.72
December 3, 2012: 15.70
High: 16.43
Low: 14.72
Range: 11%
% Off Highs: 4.4%
Performance Since August 1, 2012: +6.66%

best performing sector since Aug 1. moderate pull back from highs.

XLI - Industrial Sector SPDR ETF

August 1, 2012: 35.81
December 3, 2012: 36.73
High: 38.07
Low: 35.19
Range: 7.9%
% Off Highs: 3.5%
Performance Since August 1, 2012: +2.57%

a very China dependent sector, showing signs of a coiled spring (triple top, ascending wedge, formation dating back to 2011) getting ready to pop. could be the biggest winner of fiscal cliff resolution.

XLP - Consumer Staples Sector SPDR ETF

August 1, 2012: 35.63
December 3, 2012: 35.91
High: 36.59
Low: 33.97
Range: 7.3%
% Off Highs: 1.9%
Performance Since August 1, 2012: +0.8%

well, looks like we found the sector the S&P has been closely mirroring last 4 months. low volatility sector and not much off its highs.

XLU - Utilities Sector SPDR ETF

August 1, 2012: 37.92
December 3, 2012: 35.10
High: 38.54
Low: 33.85
Range: 13%
% Off Highs: 8.9%
Performance Since August 1, 2012: -7.4%

wow! for a low volatility regulated sector, utilities sure moved a lot since late summer... biggest losers since Aug 1

XLK - Technology Sector SPDR ETF

August 1, 2012: 29.45
December 3, 2012: 29.09
High: 31.74
Low: 27.21
Range: 15.4%
% Off Highs: 8.3%
Performance Since August 1, 2012: -1.2%

technology has been the most volatile since August, and is nearing correction territory as a whole, down 8.3%

XLB - Materials Sector SPDR ETF

August 1, 2012: 35.02
December 3, 2012: 36.04
High: 38.57
Low: 34.44
Range: 11.3%
% Off Highs: 6.6%
Performance Since August 1, 2012: +2.9%

average volatility and good performance for a typically volatile sector. could be seeing some support from China bottom.

XLV - Health Care Sector SPDR ETF

August 1, 2012: 38.61
December 3, 2012: 40.16
High: 41.40
Low: 38.49
Range: 7.3%
% Off Highs: 3%
Performance Since August 1, 2012: +4.0%

another low volatility sector, this one living up to its name. second best performer since Aug 1.


What we can clearly see is a sector rotation. Utilities, which by far were the hottest sector for a while, clearly fell out of favor. People have been rotating into health care, financials, industrials, and materials.

This is actually very interesting, because 3 of the 4 are very offensive, risk on sectors, and the 4th (healthcare) is very defensive. The market is clearly sending us mixed signals here. What does it all mean??

Well, let's take the XLB and XLI, materials and industrials ETFs. They seem to be telling us that China is bottoming. This could be a huge opportunity to get into industrial names like Caterpillar, Cummins, or Deere. Keep an eye on these going forwards. I think any sell off due to fiscal cliff is an opportunity to buy large cap industrials.

XLF is interesting, because financials are the most levered to the economy's performance, but could this move have something to do with housing? Look at Home Depot! It isn't even aware there is a fiscal cliff looming. On the flip side, if you look at Wells Fargo, it's actually down during the reference period. JP Morgan and Citigroup, however, tell a different story, being up 15% and 25% respectively. However, upon closer analysis, we see all of the run up occurred during the 3 months prior to election day, and the stocks have been trending down since mid October. My opinion on the XLF is it is inconclusive. The data is all over the place.

This break down also doesn't reveal stock specific swoons, like AT&T's 15% decline since its peak in September, or Apple's nearly 30% decline in the same time period. Both these have created opportunity for long term investors. AT&T is approaching a level where I will seriously look at it again, after selling it in the $38 range earlier in the year.

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