With 2009 racing to a quick close, I thought it would be good to step back and take a reference at both the percentage performance of the S&P 500 and top AMEX Sector SPDRs beginning with January 1st and then the July 2009 lows to early December.  It’s a picture of sector strength for sure – but let’s look a bit closer.

First, AMEX Sector SPDR performance from January to December 2009:

Whenever I look at the “Sector Rotation” or sector performance data, I always begin by segmenting into “offensive” or aggressive (risk-seeking) sectors such as Financials, Technology, Consumer Discretionary (green box) and Defensive or conservative (risk-averse) sectors such as Consumer Staples and Utilities.

This gives you a better look at the market as a whole, drilling down to measure risk seeking or risk averse behaviors by larger funds.

You expect to see outperformance relative to the S&P 500 in the “offensive” sectors in a bull or rising market, and relative outperformance in the “Defensive” sectors during down markets where money managers – who have to be long – try to ‘hide’ to preserve capital in the market.

That is exactly what we see above – since January 2009, the S&P 500 is up almost 25% to present, with three sectors beating the S&P 500:

Consumer Discretionary (Retail) up 38.75%
Technology up 47.25%
Materials up 47.13%

To no one’s surprise, the “Defensive” sectors are under-performing the S&P 500 (that’s Consumer Staples, Health Care, and Utilities).

This is a comfortable sign of risk-seeking behavior by larger funds throughout 2009, but it’s also important to take a look at recent reference points to see if this same pattern is holding up on shorter, recent time periods.

Next, a look specifically at the returns from the early July ‘bottom’ to present swing highs:

So far, it is.

This time, we see broader outperformance, with the S&P 500 yet again being up 25% since the early July 2009 low of 875 (the infamous “Failed Head and Shoulders” pattern) while more sectors are beating or outperforming the S&P 500.

This time, Financials (critical to an economic recovery) and Industrials join Retail, Tech, and Materials to produce a strong showing of market confidence and strength.

Yet again, no surprise that the “Defensive” sectors – while up around 18% each – are ‘under-performing’ the S&P 500 (again, up 25% in the same period).

Until we start seeing underperformance in the “Aggressive” sectors and out-performance in the Defensive sectors, it is a sign that the “Big Funds” are betting on further market recoveries and a general bullish outlook moving forward… according to the Sector Rotation Model.

Corey Rosenbloom, CMT

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