Asset Class Weekly: Winner, Winner, Chicken Dinner

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Includes: AAPL, AMZN, CALM, CPB, CSCO, DD, DOW, EOG, FB, IBB, INTC, IYT, KHC, KRE, NFLX, OXY, SPY, T, VZ, WMT, XLB, XLE, XLF, XLI, XLK, XLP, XLV, XLY, XOM
by: Eric Parnell, CFA

Summary

It has been more than a week now since the S&P 500 Index bottomed, but the bounce has been generally uneven and lethargic thus far.

This suggests that an eye toward risk control remains prudent in the current environment.

Thus, it is worthwhile to consider how stocks are performing on a sector basis to determine which are showing leadership and which are lagging.

It has been more than a week now since the S&P 500 Index bottomed and began to bounce. But despite the fact that the market is now more than +115 points on the S&P 500 Index above its lows from last Wednesday, the magnitude of the bounce has been generally unexciting. This suggests that an eye toward risk control remains prudent in the current environment. With that in mind, it is worthwhile to consider how stocks are performing on a sector basis to determine which are showing leadership and which are lagging both during the correction and the subsequent bounce.

Stock Market Lethargy

The recent bounce in the stock market has been lethargic to say the least. It got off to a promising start at first. Following an impressive intraday bounce last Wednesday, the benchmark S&P 500 Index (NYSEARCA:SPY) surged higher to close out the week. But it has effectively stalled in the trading days since. Overall, it traced sideways for the first four days of this week before finally showing some renewed verve on Friday. But given the staggeringly strong rallies that investors have become perhaps too accustomed following sharp corrections in the post-crisis period, life behind the latest bounce has certainly been lacking.

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But one of the things that has increasingly characterized the stock market as the Fed has further stepped away from its policy stimulus is increasingly differentiated performance within the market. And this has been notably true during the most recent correction that began on December 29 and the subsequent bounce that started last Wednesday.

The Commodities Sectors: A Continued Bumpy Road

The commodities sectors in energy (NYSEARCA:XLE) and materials (NYSEARCA:XLB) have certainly played their part in driving the recent market decline. But in a notable twist, it has been the materials sector, not energy, that has been leading to the downside.

Certainly, energy continues to struggle amid the climate of persistently weakening oil prices. And while the energy sector did trail the broader market to the downside, it has subsequently lead it to the upside and is now marginally outperforming over this combined time period.

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Exploring under the surface of the energy sector reveals that size and quality do matter when it comes to investing in more volatile and declining markets, for the largest and most stable names in the sector have meaningfully outperformed not only the energy sector but the broader market since the end of December. Leading among these is Schlumberger, which is up nearly +2% over this time period, followed by Occidental Petroleum (NYSE:OXY), EOG Resources (NYSE:EOG) and Exxon Mobil (NYSE:XOM), which are down -0.4%, -1.1% and -2.3%, respectively, all of which are much better than the -6.3% decline on the S&P 500 Index over the same time period.

It has been a different story for the materials sector. For not only have materials trailed the S&P 500 Index to the downside, they have at best matched the market during the subsequent correction, leaving the sector behind by nearly -13% over the duration of this latest correction. It is worth noting that merging chemical giants Dow Chemical (NYSE:DOW) and DuPont (NYSE:DD) are leading the charge in this regard, as both are down over -22% since the end of December.

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Cyclical Sectors: These Kids Are NOT Doing Their Own Thing

The cyclical sectors of Industrials (NYSEARCA:XLI), Consumer Discretionary (NYSEARCA:XLY) and Technology (NYSEARCA:XLK) have effectively tracked the S&P 500 Index step-for-step during the latest correction and subsequent bounce. This is not necessarily surprising for industrials, which is the sector with the highest correlation to the S&P 500 Index of the nine major groups. One important takeaway, however, is the continued trailing performance of the transports (NYSEARCA:IYT) from within the industrials sector, which does not bode well for the stock market outlook if history is any guide.

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As for consumer discretionary stocks, perhaps what is most notable is that the magic that had propelled the sector to strong recent outperformance appears to now be gone. For what had been driving the sector higher was the blistering performance of the online retail names in Amazon.com (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX), which are down -14% and -22%, respectively, during the most recent pullback and bounce.

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And as a further demonstration of how the market tide may be turning, it's starting to look like 2014 again, or 2008 for that matter, as the New Year has seen a flip with Wal-Mart (NYSE:WMT) now leading Amazon.com by a wide margin after the online retailer's stock had trounced its bricks-and-mortar counterpart last year.

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As for technology , it has been a differentiated mix bag in and of itself, with winners such as Facebook (NASDAQ:FB), AT&T (NYSE:T) and Verizon (NYSE:VZ) being offset by laggards such as Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC) and Cisco Systems (NASDAQ:CSCO).

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Financials: Tarred And Uninterested

Financials (NYSEARCA:XLF) have suffered a big one, two punch during the latest market pullback and bounce. First, the latest decline in oil had many investors looking under the loan portfolio hoods across the financial sector and in many cases not liking what they were seeing. Regional banks (NYSEARCA:KRE) in particular have been scorched in this regard. Second, all the buzz about the Fed raising interest rates by as many as four times in 2016 and giving financial institutions a long-awaited boost to net interest margins has all but gone to the wayside following the bumpy start to the New Year. As a result, financials as a group trailed to the downside during the pullback and have trailed to the upside once the bounce got underway.

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Health Care: May Not Be So Defensive This Time Around

The health care (NYSEARCA:XLV) sector has long been viewed as one of the three defensive pillars in the stock market. But the sector may not be so defensive for investors this time around. This is being evidenced by the fact that not only are health care stocks largely tracking the broader market to the downside since late December, if anything it has marginally trailed along the way. Of course, the primary culprit has been the once high-flying biotech (NASDAQ:IBB) industry, which is down by -22% since the start of the latest market correction and unlike the broader market, has not bounced but instead set new correction lows in the last couple of days.

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Consumer Staples: Steady As She Usually Goes

The consumer staples (NYSEARCA:XLP) sector, on the other hand, continues to deliver as it usually does during periods of market stress with more steady results relative to the broader market. At its worst during the recent pullback, the sector was down only -6.5% versus -11.5% for the broader market. And it has since outperformed the S&P 500 Index during the subsequent bounce.

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Helping to drive the charge for the defensive sector are food stocks, with names like Kraft Heinz (NASDAQ:KHC), Campbell Soup (NYSE:CPB) and Cal-Maine Foods (NASDAQ:CALM) all higher by more than +5% since the latest pullback got underway at the end of December.

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Utilities: What Stock Market Pullback?

But one sector more than any other continues to demonstrate itself as the champion during stock market corrections. Not only did utilities not really suffer any measurable downside during the correction phase from December 29 to January 20 with a maximum loss in value of just -2%, they have also proceeded to lead the broader market to the upside in the days since the market bottom. After what was a rough 2015, it appears the utilities sector may be back to its 2014 form at least so far in 2016. And an uncertain economic outlook coupled with moderating expectations for higher interest rates have the potential to keep the wind at the back of the sector for the foreseeable future.

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The Key Takeaways

So what are the key takeaways from this U.S. stock market sector breakdown? The following are the themes that investors may wish to consider when allocating for the weeks and months ahead.

First, volatility continues to reign in the commodities sectors with heavy downside pressure followed by uneven performance during subsequent bounces.

Also, cyclical sectors are generally reverting to market-like performance and are providing little in the way of any meaningful diversification benefit at present.

Third, the hoped-for tailwinds for the financial sector have shifted into becoming headwinds and may continue to be so until oil finally stabilizes and/or the economy picks up additional steam.

Next, health care should not be viewed as a defensive sector heading into the next bear market phase, as it carries with it the biotech sector that may still be in the early stages of working off froth that had accumulated over the prior three years from 2013 to 2015. The sector can still offer some defensive, but investors must now dig in and pick out individual names.

Lastly, the defensive pillars of consumer staples and utilities remain very much intact. Valuations are high across the consumer staples space, so investors may be well served to roll up their sleeves and pluck the food, grocery and household product names they like best going forward. As for utilities, performance has been solid across the sector with gains being widespread across the electric, natural gas distribution, diversified and water segments.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I am/we are long WMT.

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.