Watching Sectors Decline

By Bryan McCormick

Today I wanted to show how rapidly sector breadth deteriorated after the S&P 500 hit its peak in mid-June. That is illustrated here with an updated SPX chart and some of its nine sectors viewed on a daily, year-to-date basis.

The histogram of lighter blue vertical bars is the S&P itself. The zero line is there because this is a graph showing percent returns, not price. The lines scattered on top of the histogram show the various sectors.

At the peak in the S&P 500, six sectors were briefly all in the green for the year. There are now just three that are positive year to date--technology, materials, and consumer discretionary, in descending order of positive returns.

Technology is now the best-performing sector, shown in light green, which you can follow by watching the Technology Select Sector SPDR (XLK). That exchange traded fund is up 12.9 percent year to date. The worst sectors--the industrials and financials, represented by the Industrial Select Sector SPDR (XLI) and Financial Select Sector (XLF) funds--are in pink and dark green, well below the zero line.

Up until mid-June, the materials sector was the best-performing industry, shown by the yellow line on the chart. It was up well over 20 percent at one point, but is now up 6.1 percent.

Consumer discretionary is barely hanging on to its gains, at 1.99 percent. If that should slip as well, only technology and materials would remain positive. And, given the weighting factors--with technology 21.86 percent of the index and materials just 3.18 percent--it is really technology that is pulling the index up virtually by itself.

That would be fine as long as tech stocks report great earnings in the next several weeks. If they do not, that leaves the index extremely vulnerable.

The more broadly the index is supported by a multitude of sectors performing well, the better off it is. The narrower the breadth, the weaker it may become if that sector or sectors fail to perform.

Watching sectors in relationship to the broader index offered an early clue that something not bullish was in development. Watching them over the next several weeks may help us discern the next big move.

(Chart data provided by Thomson Reuters)

Comments

[Fighting Yoda:]

Tech may not save the day, they are simply dependent on big enterprises including financials for business - everyone is shrinking or barely holding on. Niche players like of Google, Apple etc may do OK but overall no. I will not expect anything good out of the big techs.
Now that the green shoots are dead - all market palyers are simply planning an exit strategy - we are seeing trickles now - it may turn into a deluge - there are signs of this buildup.

Jul 10 05:00 PM

[untrusting ...:]

Yoda, sounds about right to me. Has been trending down for what, four weeks now, so if the past couple of downlegs are any indication, it could well be another serious sell-off for the next 6-12 weeks. Seems like the only things that might slow the downleg trend down are very good Q2 results (unlikely), or major renewed support by the PPT (maybe unlikely as GS,etc may be switching to short and have probably dumped most of their oil). Seems like odds favor at least a move back to about S&P 800, with some decent chance of retest of March lows. If most of market corrects, Tech will follow down as well.


On Jul 10 05:00 PM Fighting Yoda wrote:

> Tech may not save the day, they are simply dependent on big enterprises
> including financials for business - everyone is shrinking or barely
> holding on. Niche players like of Google, Apple etc may do OK but
> overall no. I will not expect anything good out of the big techs.
>
> Now that the green shoots are dead - all market palyers are simply
> planning an exit strategy - we are seeing trickles now - it may turn
> into a deluge - there are signs of this buildup.

Jul 11 03:08 AM