Defensive Sector Posturing Occurring

May 22, 2008: 10:16 PM CST

Let’s take a look at the recent sector money flow performance to see if we can glean any clues for the broader market, especially regarding risk-seeking or risk-avoiding behavior by larger funds.

The 10 day rotation has taken money into the areas traditionally known as ‘defensive’ sectors, including Health Care, Consumer Staples, and Utilities.

Energy (thanks to record crude oil prices) came in just slightly second to the Utilities stocks (which tend to do well in environments of low interest rates), while the Financial sector fell almost 4%, in a negative sign for the broader market.

If these trends continue, we could expect further broad market weakness.

Let’s look at the sector money flow for the year to date to see if there are any clues in its development:

While I don’t have these bars clearly labeled, the Financial sector has performed the worst in 2008, shedding 13% while the energy sector has gained almost 11%.  Higher energy prices tend to be bearish for the broad economy as consumers and businesses cut back on spending in other areas to compensate.

The only other sector positive for the year is the Materials, which has been boosted in part by new record highs in commodity prices.

The one strange ‘anomoly’ as I see it for the Sector Rotation model is the Health Care losses so far this year – typically that sector holds its own in a declining economy according to the model but this year has been an exception so far.  It may be worth looking deeper on that point.

Continue to watch money flow into and out of sectors according to the model for clues as to what might be a better place for your money, as well as what the model might be saying about the broad economy.

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