It’s a bull market! Everything is going up because of the Bernanke Put! Take risk!
Not so fast. At the end of December I put an article out arguing to prepare for a January correction given weakness in beta-driven sectors of the market. More recently, I’ve noted that defensive sectors such as Utilities (XLU), Consumer Staples (XLP), and Healthcare (XLV) relative to the S&P 500 (IVV) appear to be bottoming in terms of relative weakness to the broad market averages.
And admittedly, I’ve been wrong (at least partially, so far). To most investors looking at the Dow (DIA) or the S&P 500 (IVV), January’s first 2 weeks have been fantastic. It feels like the market will continue to rally higher. Much of the strength has been the direct result of a surge in Energy and Financial stocks. Both of these sectors performed relatively poorly in 2010, and in classic mean reversion fashion, went from being poor performers last year to strong performers this year.
As I noted in my article "Aggressive Sectors Are Weakening or Rolling Over; Only Financials Offer Near-Term Gains," a call on the broader markets was very much a call on the performance of Financials, and looking at how that sector has performed so far has shown that to be the case. I also noted in November of last year in an article called the "Return of Energy a/k/a the End of Retail" that Energy would likely outperform at the expense of Retailers.
In contrast, look at how poorly stocks connected to metals and the consumer have done. These sectors did quite well in 2010, and now are performing poorly. It appears that a correction in January has been taking place in certain industry groups and certain commodities such as Silver (SLV) and Gold (GLD/GDX). These may very well be the first to fall. Broader equities averages may be next. I suspect that broader markets continue to rally for a few weeks longer and the January correction may very well be delayed to February for the reasons I’ve laid out in earlier articles.
Disclosure: The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing.