S&P500 (SPY) is up 11.26% over the last 52 weeks. Which sector led the market higher during this fourth year of the bull market? Healthcare! Health Care ETF (XLV) went up 20.58% during the same period.
Which sector lagged the broad market? Technology! Technology ETF (XLK) is barely positive over the last 52 weeks, up only 0.65%.
We feel that the market leadership over the last year signals that this 4-year old bull market is coming to the end. Specifically, healthcare is not an economic sensitive sector, rather it can be viewed as a defensive play, generally uncorrelated with the broad market. Healthcare sector is driven by demographics -aging baby boomers, policy and regulation, medical innovations, and not by the economic cycle.
On the other hand, technology sector is heavily influenced by the economic cycle. Specifically, the public and private sectors generally invest in new technologies during the economic upturns. Thus, tech companies experience rising profits with expanding margins as economy grows. As a result, tech companies usually lead the market higher. Further, since tech stocks are considered as growth stocks, their P/E ratios expand, which causes the average market P/E ratio to expand as well.
Thus, we feel that the market leadership over the last 52 weeks is sending a bearish signal - money potentially rolled over from the economically sensitive tech sector to the defensive heath care sector. In support, consumer staples (XLP) also returned above the average nearly 14%. Other economically sensitive sectors also lagged the broad market. Energy (XLE) and materials (XLB) are up slightly over 7% over the last 52 weeks, while industrials (XLI) are up 10%.
On the other hand, financials (XLF) and consumer discretionary (XLY) sectors are up over 17% over the last year. We feel that this is not a sustainable leadership, rather still a bounce from the financial crisis. The theme of the Fed bailouts of financials, ultra low interest rates, and further lending to consumer to spend on discretionary items is not sustainable, and it can only lead to a disappointment, or a new crisis.
Market commentators notice that the S&P 500 P/E ratio at around 15 is still undervalued relative to the P/E ratios at the market tops, around 19. Thus, many see this as a bullish sign that this bull market still has legs to run. For this to happen, money would have to rotate back to technology. We just don't see this happening in the fifth year of the bull market. Rather, we would be taking profits, especially from the consumer discretionary and financial stocks, as this bull market might be near the end.
|Health care XLV||20.58%|