The Other 'Great Rotation' To Defensive Sector ETFs

Includes: SPY, XLP, XLU, XLV
by: Tom Lydon

By John Spence & Tom Lydon

The S&P 500 and other major U.S. stock benchmarks are trading near all-time highs but within ETFs, the traditionally defensive sectors such as healthcare, utilities and consumer staples have been the best performers the past few months.

Defensive sectors leading the way isn't exactly an encouraging sign for the bulls.

SPDR S&P 500 ETF (NYSEARCA:SPY) is up 7.8% for the trailing three months, according to investment researcher Morningstar.

However, Utilities Select Sector SPDR (NYSEARCA:XLU) is up 14% to nearly double the return of the S&P 500, while Consumer Staples Select Sector SPDR (NYSEARCA:XLP) has gained 13.6% and Health Care Select Sector SPDR (NYSEARCA:XLV) is up 13.7%.

"These historically more defensive groups are ripping to new highs. These sectors are the reason that U.S. stock market averages are anywhere near highs. A lot of the components of the market aren't participating," writes J.C. Parets at the All Star Charts blog. "We're in a current market environment that is being driven by just a few sectors. The majority of the others have been drifting lower for four weeks."

The technical analyst cautions investors to take headlines about new all-time market highs with a grain of salt.

"There are weak sectors within the market, and there are some really strong ones," Parets noted. "The bulls want to see some rotation out of the defensives and into the sectors that have been struggling if this market is going to keep grinding higher. The bears want to see follow through from the struggling ones and have the leaders play catch-up to the downside."

Utilities Select Sector SPDR

Full disclosure: Tom Lydon's clients own SPY.

Disclosure: I am long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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