What Really Led the Rally? Weighting by Sectors

By Bryan McCormick

The rally since the unofficial start of earnings season on July 8 has been led by technology, which is no surprise to anyone given the gains. But we do find something unexpected beneath the surface that requires some thought.

First, in looking at the S&P sectors without weights involved, here is the percentage gain for each ranked in descending order. I am only looking at the move from the July 8 to this morning's trading.

Materials 17.27
Energy 13.78
Industrial 12.74
Consumer Discretionary 12.55
Technology 12.44
Financial 11.34
Utilities 8.42
Health Care 6.05
Consumer Staples 5.4

As you can see, technology is off its the lows but is a relative laggard. Instead, it is the trifecta of energy, materials, and the industrials that have been better relative outperformers among all the sectors.

Bear in mind that, heading into the market low of July 8-10, technology had not fallen nearly as much as the other sectors. In fact, it is the only sector, other than consumer discretionary, that exceeded its year-to-date gains from the previous market peak in mid-June. (Remember, we are just looking at the gains in terms of how far we have moved from recent lows.)

Now below is the same table as above, but with the relative weights taken into account. The values in the percentage column are the relative gains contributed to the broader index by each sector. In other words, we have ranked these now as they have contributed to S&P's advance of more than 10 percent gain from July 8.

Technology 2.8
Energy 1.7
Financial 1.51
Industrial 1.25
Consumer Discretionary 1.14
Health Care 0.81
Consumer Staples 0.63
Materials 0.58
Utilities 0.34

As I hope this makes clear, weighting factors are tremendously important determinants of point contribution to the index. It is, however, critically important if you are looking at sectors for investment to think about them without the weights involved. Materials and energy, for example, were far better bets off the lows than was tech--a fact that weighting obscures.

Comments

[I need more...:]

www.oftwominds.com/blo...
Bullshit led the markets

Jul 25 01:53 PM

[Market Sniper:]

Some observations: Since the July 13 low, measured by SPY, every day has had a higher low. This is not letting in some of the bulls looking for an entry on a pullback. This structure is very different from the rally off the March 9th low where we had a couple of days advance followed by a short pullback, another couple of days advance, followed by a short pullback. The structure is different this time. Also, ALL 10 of the S and P sectors are now above the 200MA. This leads to the following conclusions: 1)This advance will go higher than most believe (most probable); 2) pullbacks will be extremely short and shallow (probable) or 3) when the pullback comes, it will be hard and sharp (least probable). That is a short term perspective. The long hard wave down in price should come in late fall.

Jul 25 06:01 PM

[LKofEnglish:]

bs led the markets? when last i checked everyone on this entire site save one wants the market to collapse let alone the President himself. And they call it seeking alpha. perhaps waiting for Godot is more appropriate. this rally it being fueled by the most incompetent economic policies in American history (and there have been some real doozies in this nation's history.) better start running towards that train that left the station months ago because its the only game in town and this train (meaning this raging bull market, and i mean RAGING) is just getting started. just remember, just because your paranoid doesn't mean they're not coming after you.

Jul 26 02:03 AM

[upgrayed:]

Good point, most of the commenters let their ideology get in the way of making money - myself included


On Jul 26 02:03 AM LKofEnglish wrote:

> bs led the markets? when last i checked everyone on this entire
> site save one wants the market to collapse let alone the President
> himself. And they call it seeking alpha. perhaps waiting for Godot
> is more appropriate. this rally it being fueled by the most incompetent
> economic policies in American history (and there have been some real
> doozies in this nation's history.) better start running towards
> that train that left the station months ago because its the only
> game in town and this train (meaning this raging bull market, and
> i mean RAGING) is just getting started. just remember, just because
> your paranoid doesn't mean they're not coming after you.

Jul 26 09:58 AM

[Danny Newton:]

It seems like the top four areas are all subsidized by state, local and federal governments in some way.

Jul 26 11:19 AM

[User241885/...:]

Liquidity matters, whether it comes in the form of twenty years of steadily falling interest rates or twenty weeks of torrential cash infusions through the initial TARP funding. Since the quarterly earnings report season has dovetailed with four months of upward market fervor, people should be wondering how sustainable are the earnings we are now seeing.

The breakdown of the successful sectors and the effect of their weightings in the S&P 500 really does illustrate how "new liquidity" has benefitted those TARP-taking sectors, financials especially. We seemed to have benefitted from a short-lived returned our of old friend Velocity. Thank you TARP.

TARP liquidity has yielding an incredible windfall for the only line of revenue: trading. If you were to analyze the traditional drivers of their revenue for commercial and investment banks, lending/ asset management and underwriting/ brokerage respectively, you would see what is really going on, or rather what is really not going on. Can anyone tell me how the newly created bank holding companies are going to produce another strong quarter when the TARP spigot is turned off?

One need only look at a GE's quarter to see what is happening to companies that rely on real sales and real capital investment. Earnings down almost 50%. It's too bad GE didn't have its hands stuffed in to TARP wielding pockets of Congress. If another round of stimulus is approved, they may have a second chance.

Since the administration has already once demonstrated its willingness to mortgage future generations to the hilt, we probably do get another stimulus package and the attendant strong liquidity rally. Only traders rule in this scenario, so why don't we ask them to judge the benefits:

Let's see now, purchasing power for kids and grandkids completely destroyed in their lifetime or maybe one more good quarter for financials in ours.

.

Jul 26 05:12 PM

[MSimon:]

"better start running towards that train that left the station months ago because its the only game in town and this train (meaning this raging bull market, and i mean RAGING) is just getting started. just remember, just because your paranoid doesn't mean they're not coming after you."

Of course it is raging. The Treasury has re-inflated the bubble as best as it could. It always looks real good at the beginning of one of these episodes. Watch out for inflation. Can you make profits? Of course. Is the situation good for the real economy? Of course not.

Jul 26 07:53 PM

[CLH:]

The market rally will continue while most investors look on still too frightened to make money.

Jul 27 08:07 AM