U.S. Equity Sector Dashboard: Avoid Utilities; Sanguine On Energy, Financials And Healthcare

|
Includes: IDU, IYC, IYE, IYF, IYH, IYJ, IYK, IYM, IYW, IYZ
by: FundGuru

Summary

Cyclical sectors generally led returns in March, although Utilities have also done extremely well.

The strong market rebound has left many sectors in short-term overbought territory, except Energy, Financials and Healthcare.

We believe some near-term consolidation is possible, although markets may continue to march higher before falling.

We recommend investors avoid the Utilities sector.

Introduction

This is the first of a series of monthly market reviews that look at the performance of US equity sectors.

The aim of the article is to help investors understand which sectors are overbought or oversold over both a short-term (rolling 6 months, R6M) and an intermediate-term horizon (rolling 3 years, R3Y).

For some background reading on the historic risk and return characteristics of equity sectors, please refer to our previous article "Bear Market Investing: The Right Neighborhoods Matter."

Data

To assess the performance of US equity sectors, we rely on the following ten sector indices compiled by Dow Jones. The corresponding iShares ETFs are in brackets:

  1. Dow Jones US Basic Materials Index (NYSEARCA:IYM)
  2. Dow Jones US Consumer Goods Index (NYSEARCA:IYK)
  3. Dow Jones US Consumer Services Index (NYSEARCA:IYC)
  4. Dow Jones US Financials Index (NYSEARCA:IYF)
  5. Dow Jones US Healthcare Index (NYSEARCA:IYH)
  6. Dow Jones US Industrials Index (NYSEARCA:IYJ)
  7. Dow Jones US Oil & Gas Index (NYSEARCA:IYE)
  8. Dow Jones US Select Telecoms Index (NYSEARCA:IYZ)
  9. Dow Jones US Technology Index (NYSEARCA:IYW)
  10. Dow Jones US Utilities Index (NYSEARCA:IDU)

Our returns are based on monthly data, total returns through March 31, 2016.

Market Overview

US equity market staged a strong rebound in March, with the large-cap S&P 500 returning +6.8%. Small- and mid-cap stocks did even better, returning +8.2% and +8.5%, respectively.

From a sector perspective, more cyclical sectors such as Energy (+9.7%), Technology (+9.2%) and Basic Materials (+8.7%) led returns in March. More defensive sectors such as Healthcare (+3.1%), Telecommunications (+4.5%) and Consumer Goods (+5.8%) lagged.

1. Basic Materials

The recent strong performance of the Basic Materials sector has pushed short-term returns (R6M) to an overbought territory. On an intermediate-term basis (R3Y), its returns remain neutral.

2. Consumer Goods

A similar story with Consumer Goods. Short-term returns (R6M) are currently elevated relative to history, but so are longer-term returns (R3Y). This is because consumer Staples have been one of the best performing sectors in recent years.

3. Consumer Services

Short-term returns (R6M) for Consumer Service stocks are currently just above the mean (red line), so it is not yet overbought. Intermediate-term returns (R3Y) are quite elevated, like Consumer Goods.

4. Energy

Energy stocks staged a magnificent rally in March. Short-term (R6M) returns are currently sitting squarely at the mean, up from an oversold territory the month before. The sector remains oversold on an intermediate-term basis (R3Y).

5. Financials

Financials are now back in neutral territory (R6M), from oversold levels the month before. Its intermediate-term (R3Y) returns are just sitting below overbought levels.

6. Healthcare

The healthcare sector is currently neither overbought nor oversold, as short-term price momentum (R6M) is sitting at the mean. The sector is overbought on a 3-year basis (R3Y).

7. Industrials

Short- (R6M) and intermediate-term (R3Y) returns are now both elevated for the Industrials sector, given it is one of the best performers in March.

8. Technology

The same story goes for Tech stocks. Short- (R6M) and intermediate-term (R3Y) returns are both currently elevated relative to history.

9. Telecommunications

Short-term returns (R6M) for Telecom indicates the sector is overbought. Over a long-term basis, it is similar.

10. Utilities

Despite being a traditionally defensive sector, Utilities was one of the best performers along with more cyclical sectors in March. As a result, its short-term price momentum (R6M) is approaching a very overbought territory. Over the intermediate-term (R3Y), it is also overbought.

Summary Thoughts

The strong market rebound in March has seen many US equity sectors approach an overbought territory. Although markets may continue to march higher in April, some consolidation is possible in the near term, if there is an uptick in volatility from the current very low levels.

Investors may continue to find some bargains in the Energy, Financials and Healthcare sectors, as they are not yet overbought on a short-term basis, but we recommend avoiding the Utilities sector altogether.

For a similar analysis at the asset class level, readers may wish to refer to our Monthly Equity Market Update series.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.