Given the correction we seem to be getting – which was indicated as likely on my blog last week – I thought I’d look at the major US sectors to see how the defensive names are doing. That is, how the utilities and staples, might be faring. Sometimes you will see an initial move into these sectors during a minor market correction. Should the correction be too deep, you might see them fall along with the higher growth sectors. But if you guess, as I do, that the current correction may be somewhat short – or shallow – or both – they can be a good place to hide.
Right on schedule, we seem to be getting that rotation. If we look at the year-to date chart of the S&P sectors, we can see that these two sectors performed similarly this year as they did last year. That is, utilities and staples were the dogs breakfast last yr and so far, YTD.
But…
If we look at the last 10 days or so of trading, the picture changes. Note the positive performance of these two unloved sectors – vs. largely lower performance by the other sectors. In fact, its really just the cyclicals and healthcare that are holding up in strength without outbound rotation (relative underperformance). At least in this very small data sampling.
Don’t run out and pile into staples and utilities just yet (although I will admit we do own the staples ETF and made it a Top Pick on my last BNN show as a contrarian play). Its too early to call this potential rotation the real deal. But its interesting enough to keep an eye open for a shift, which might merit a portfolio re-allocation – should the market continue to rotate as it has in the last two weeks.
We shall see.
BTW- I also note that the long treasury bond recently (late 2017) gave a long term (monthly chart) ROC buy signal, and does seem to be finding support on the trendline as I write. See the chart below. I discussed that potential for t-bonds to act in negative correlation to stocks in this blog – which details a few sectors to hedge with in a market correction:
Happy trading!
8 Comments
I know you don’t like to comment on individual stocks. GE has been very important to many investors. Should I continue to hold GE shares? Do you think it could go down further? Thanks.
I will make an exception for you here John, given it is a big stock, and you are a long time reader
So: GE is at a momentary point of support–hitting it today at around $12.85-ish. You really don’t want to see that cracked for more than a few days (if it in fact does break $12.85). If it stays below that support level, personally, I would sell. you have to decide if that’s the way you think, but that’s my discipline. Also–there are better stocks you could swap to – take your loss and move on. So if it can bounce from here, I would watch for a near termed exit. It is likely not turning around for a while.
Interesting GE came up yesterday in your comments, the very day it was expelled from the Dow. Sad case indeed. The longest continuous stock (since 1907) in the average is now gone. How is that to effect the stock price? Down 1.13% today so far. John’s patience is admirable.
I’m surprised even with the so called Trump trade war this market hasn’t tanked
Hi Keith,
Is there a way to Hegde a portfolio with options, let’s assume I only hold an ETF like SMH or PSJ. There seems to be always a trade off as you will give up some of the returns when using a covered call or just buying protective put strategy. And of course there’s the cost of insurance which can erode some of the gains if you get the timing wrong. Do you use option strategies oto protect your clients portfolio?
Thanks,
Arun.
We have used Horizons single (not leveraged) ETF’s in the past–we simply offset the amount of equities we wish to hedge. It helps create a neutral market environment. Nothing is perfect, as your stocks may not reflect perfect negative correlation with the inverse index – but it is an alternative to options.
We are not holding inverse at this time. But we do hold 20% cash.
Hi Keith, Bonds are rallying along with stocks today while the US banks pull back. I am scrstching my head a bit because longer term we still expect interest rates higher a year from now. You have owned US banks with this expectation in the recent past . Do you think this is still a reasonable narrative and a reason to hold US banks?
Terry–we don’t hold any US banks now–but will revisit them as if when the charts look good. Our main concern is that they are often a key index component and tend to (often) reflect the overall market health. given our outlook for a soft (not crash) summer – we are avoiding the banks for now.