Safe Havens in Biotech and Networking?

by: Andrew Hart

The bullish tailwinds have been at the backs of equity investors since the depths of the dark lows of March 2009. In fact, the S&P 500 Index has gained approximately 61% from its panic lows. In the wake of the Chinese government trying to rein in their economy, the European Union struggling with member Greece, and an extended economic stagnation period in the US, the S&P 500 Index has shed some of the froth that has been built over the last 10 months. With the S&P 500 Index now seven percent off its highs from mid-January 2010, we decided to examine in-depth sector performance over the last few months.

Of 27 industry sectors that we studied in this commentary, there has been great disparity between the winners and losers. 17 industry sectors have outperformed the S&P 500 Index, while 10 have failed to keep pace with this widely followed market barometer since the March 2009 lows.

Below is a table of the 27 sectors (plus the S&P 500 Index) and their performance. We've used a combination of ETFs, indices and sector funds to best represent these groups.

How to read the table:

Column 1: Sector name

Column 2: Ticker symbol of sector

Column 3: The low price of sector on March 9, 2009 when the S&P 500 Index bottomed

Column 4: 52-week high for the sector

Column 5: Closing price as of February 12

Column 6: Gain/Loss of the sector since its 52-week high

Column 7: Gain/Loss of the sector versus the March 9, 2009 low

Column 8: Return of sector from its March 9 low to its 52-week high

Sector Performance Chart

ss021610tableaClick to enlarge

Since March 9, 2009 Bottom:

Looking at the “Current vs. Low” (column 7), the best performing sectors since the March 9th lows have been Cyclical-related industries (Autos, Coal, Cyclical, Steel) and Financials (Banks, Insurance, and Securities/Brokerage). These two “groups” of sectors cover seven of the top eight best performing sectors since March 9, 2009. Nearly all of these sectors have gained over 100% since their lows. It should be no surprise that these sectors performed the best, as these industries were at the epicenter of the financial crisis. With some of these industries on the brink of nationalization (particularly the banks and GM), many of the stocks were left for dead. Because of this, many stocks were able to double in price from their “low dollar” price values.

On the other hand, the worst performing sectors since March 9, 2009 have been the Defensive sectors. Healthcare, Utilities, Pharmaceuticals, Oil, and Telecom dominate the bottom feeding sectors. These sectors are typically best suited for challenging market environments, where investors are looking for areas of safety. These sectors returned only 40% or less – well below the S&P 500 Index return of 61%.

Since the Market Peak

As mentioned in the opening paragraph, the S&P 500 Index is around seven percent off its highs. Looking at the “Current vs. High” (column 6), we can see how the money has flowed in/out of various sectors by their performance. Performing the best (darker green cells) include Biotechs, Consumer Discretionary, and Networking sectors. These three sectors have only declined five percent off their 52-week highs -- while still showing gains 83%, 82%, and 109% from the March lows, outpacing the S&P 500. On the other hand, Coal, Steel, Gold/Silver, and Gaming have all lost a minimum of 14%.

Two Standouts

The two sectors that stand out from the March bottom and the most recent peak are networking and gold/silver. For the networking sector, the index gained well over 100% since its lows. Furthermore, this group has been a safe haven (relative to other sectors) in the most recent pullback. The components of the AMEX Networking Index (NWX) are: ADCT, ADTN, ALU, ARRS, AXE, CIEN, COMS, CSCO, CTV, ELX, HRS, JNPR, PLCM and TLAB.

Conversely, gold/silver suffered during the reflation period of the last several months (38% rally from March low to 53-week high) while also seeing the largest selloff from its 52-week high (19%).

Gold bugs could look at this data and be encourgaged from a contrarian perspective, as the underperformance of this group may reverse relative to other groups and the market. On the other hand, holders of ETFs and stocks in the Biotech, Consumer Discretionary, and Networking areas may be encouraged by the combination of resilience and performance shown in those groups.

Disclosure: No positions