Growth vs. Defensive Sector Performance

by: Digital Trading

Below is a high level overview of recent sector performance. I am using the SPDR ETFs to gauge sector performance in this analysis. If you are unfamiliar with these sector ETFs, here is a quick run down of which sector each ETF represents:

Before I delve into the data, I wanted to give a piece of color on sector performance relative to the market. The major sectors can roughly be be broken down into two categories: growth and defensive. In an up market, growth sectors tend to outperform the defensive ones as investors are more willing to put their money to work in stocks with higher growth opportunities (as opposed to “safer”, or defensive, names). Growth sectors are Technology, Financials, Energy, Materials, and Industrials. Defensive sectors include Consumer Goods, Utilities, and Health Care. So we want to see growth stocks leading the way and have defensive names at the bottom in a strong market.

Bearing that in mind, below is a compilation of data for the weekly performance of sector ETFs as well as the S&P cash index since the beginning of October, a month during which we saw a nice rally. Note the dates at the top of the charts represent the last day of that week.


There’s a lot of data there, but what I see is that for each week the top performing sector was a growth one. Another way to view this data could be to try to spot sector rotation. I’m not an expert on that subject, but from a very high level perspective, during October’s rally, we did see the various growth sectors rotate in leading the market. An interesting pattern is that we often see a sector that is underperforming the market one week will outperform the following week. In a bull market, I would view this rotation as a healthy sign as buyers step in to buy stocks that appear cheap.

The clearest example of this sector rotation can be seen for the weeks ending 10/15 and 10/22. Note that the laggard ETF for these weeks became the top performing one the following week. The XLF, for instance, was the weakest for the week ending 10/15, only to be up 1.79% the following week, making it the best performing sector. For the week ending 10/22, the XLB was the laggard, but the following week, the XLB was up 1.49% at the top of the list.

Moving on from the sector rotation topic, to be sure of the outperformance of growth sectors over the defensive ones, below outlines how the sectors performed over the past 60, 30, and 5 days (as of the end of last week):

The market has been in a clear uptrend over the past 60 and 30 days and the break down of sector performance attests to this rally. For both of these time frames, the market was led by the growth sectors XLE, XLK, and XLB (XLY as well, but I would be careful when looking at the [[XLY data]] as the Consumer Discretionary sector tends to be fairly broad; also, the XLP, which represents Consumer Staples, is viewed more as a defensive sector than the XLY, if you cannot already infer that from their names). Furthermore, in the last 60 and 30 days, the XLV, XLP, and XLU defensive sectors remained at the bottom, which is a positive sign in a strong market.

Now shifting the attention to the last five days (the five sessions of the week ending 11/12/10), the XLE, a growth sector, was the top performing sector, which is a positive sign, although note that the XLE has been particularly strong over the past 60 days. Hence, that strength may have carried over to last week. Recall that last week was the worst week the market has seen since mid August of this year. What is a bit worrisome to me is that the XLP and XLV, which were clearly at the bottom in the last 60 and 30 days, moved higher up the list, even outperforming the S&P.

Meanwhile, the XLB, XLK, XLI, and XLF fell to the bottom, underforming the wider market. Now, the argument can be made whether observing these sector relative performance trends are lagging or leading. I would say that they are largely lagging. However, they could potentially foreshadow what is to come, especially when you start to see a shift from growth to defensive sectors leading the market.

For better context, below shows sector performance in a downtrending market such as the one we saw back in May-August:

For the most part, it was the defensive sectors that outperformed the market, particularly the XLU, XLP, and XLV. The XLU and XLP were the leaders for each of these weeks save for the week ending 8/20 and 6/25. Nonetheless, it is clear, especially when compared to the stats since the month of October to present, that the defensive names dominated as the XLU, XLP, and XLV generally outperformed the market during the May-August sell off whereas these sectors underperformed in this more recent bull market.

Again, observing relative sector performance trends may be a lagging indicator. Nonetheless, it is useful to track, particularly when the market seems to be at a turning point. At the very least, I would say that it is valuable in the context of a bull market in noting sector rotation where a growth sector that is noticeably underperforming the market will likely outperform in the following week, or soon after.

Disclosure: No positions