With significant cross-currents in the market due largely to the eventual curtailing of Quantitative Easing, getting an accurate read on the overall health of the U.S. markets can be challenging. But one of the recent advances in market analytics has come in combining the 135 or so Dow Jones U.S. Sector Indexes with various forms of research, including crowdsourcing. This is really cool, because it offers unprecedented insight into which segments of the U.S. economy are experiencing capital inflows and which are experiencing capital outflows. In other words, where is capital going?
ETF providers such as SPDRs, iShares, Vanguard and others use the Dow Jones U.S. Sectors and others as templates for some of their ETFs including (NYSEARCA:XLB), (NYSEARCA:IYR), (NYSEARCA:XLF), (NYSEARCA:ITB), (NYSEARCA:IYE), (NYSEARCA:IYH) and many more, the list of available sectors is quite extensive.
So here's a great way to view the aggregate: we analyze each index independently and assign it a recommendation based on its current prevailing trend: BUY (which means the index is experiencing net capital expansion), HALF (which means that flows are neutral), and CASH (which means the index is experiencing net capital outflows). We measure what percentage of U.S. sectors are expanding, contracting, or neutral and publish the results as the clearTREND® U.S. Economic Health Index.
Here are the current results (as of 5/29/2013):
These results can be tracked on a week-by-week (or even day-by-day) basis. The best use is probably every week or two.
So why should investors care? The implications are significant: if you manage a strategy that focuses on any segment of the economy (for example, a sector rotation strategy), identifying where capital is leaving and where it is going to is everything.
If you manage an asset allocation strategy, you can use trend analysis to guide overall exposure to risk assets. For example, you might decide that your overall exposure to the U.S markets would mirror the percentage of economic sectors that are expanding (currently, a 75% exposure to risk may be appropriate).
If the economic sector you work in is experiencing capital outflows (for example the Dow Jones U.S. Asset Managers Index - ^DJUSAG), you might make personal financial decisions to reduce risk in your personal 401(k) or other investment account should your job situation become tenuous. You might also use this data to determine the appropriateness of your overall personal debt level.
If you work in mergers & acquisitions, you can use this data to identify market sectors that may be ripe for investment banking opportunities. You might also guide the owner of a private business to either execute a personal sale or acquisition when a primary trend turns.
The possibilities are many.
Disclosure: I am long IYR, XLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.