Tuesday of this week I expressed a mildly bearish sentiment regarding the broad market. Based on stock market internals including weakening market participation, the duration and velocity of the near vertical bounce off of the October lows it seemed increasingly likely that we would see some profit taking and some sort of correction. Let's see if this estimation was validated by the market.
I would say it looks like market participants did decide it was a good time for profit taking/risk reduction. Overall this week, SPY/$SPX is down ~ -3.5%. As of this post on Tuesday down ~ -2.7%. Let's take a look at the other major indices.
Let's break it down by sector. This way we can see if the selling was concentrated and if so which sectors are out(under)performing.
Note the difference in calculated weekly performance. The top chart is a bottom up calculation by finviz.com generated using all the available stocks within each of their sector categories. The second chart is from stockcharts.com and it is the trailing 5 day return of the S&P SPDR Sector ETF's relative to ( SPY ).
After that clarification, we can clearly see the selling is concentrated in the Energy ( XLE ) and Basic Materials ( XLB ) sectors. This reflects current analyst and investor sentiment regarding potential 'demand slow down' in the face of rising raw material supply.
Also note the strong relative performance within utilities ( XLU ), cyclicals aka consumer discretionary ( XLY ) and consumer staples ( XLP ). This indicates buying based on two trends.
1) The US consumer is back in a major way due to the continued persistent decline in oil prices (more on that later).
2) Defensive re-balancing taking place (read: lower expected risk). The correlation between broad market weakness and defensive sectors like consumer staples/utilities is buoyed by the following simple concept:
A LOT of the largest institutional investors (mutual funds, pension funds, insurance funds) have "long only", "fully invested", or "cash balance maximums" mandates imposed on their stock investment strategies. Therefore profit taking, or risk reduction, means they cannot sit on excess cash. It must be reinvested. Well that means if, as a portfolio manager, you believe market risk (volatility) is high (increasing), considering the aforementioned constraints, you must decrease your exposure to stocks that are really sensitive to market changes (high-beta, growth, momentum, high leverage) and increase your exposure to stocks that are less sensitive to market changes (low-beta, value, defensive, low leverage).
Hard to argue with the above. This chart shows the last 5 days' performance for a few of the largest US utilities, the S&P Spdr Utilities ETF ( XLU ), all relative to ( SPY ); SPY 5 day performance is = 0%. This gives us a much clearer picture of the relative outperformance of the utilities sector vs the broad market.
Oil is still a blood bath.
YTD: - 40%+