The stock market has been consolidating in a sideways pattern for the past several weeks. While I am still inclined to give the bull case the benefit of the doubt, my analysis of relative leadership (see Momentum + Bull market = Chocolate + Peanut butter) reveals sectoral leadership from both aggressive high beta groups and defensive sectors of the stock market.
For the bulls, I can suggest looking at Homebuilders and Gold miners. The Homebuilding group has been on a tear since last October. Gold stocks have been rallying, presumably on the assumption that the latest round of global quantitative easing by central bankers amounts to competitive devaluation and gold bullion is a beneficiary because of its status as an alternative currency.
The bears might want to consider the high yielding Telecom sector and Health Care for their defensive qualities. Telecom stocks have been beating the stock market since May, which makes it an ideal candidate for investment regardless of market climate. Health Care has shown itself to be the leadership in this current sideways consolidation period and would likely outperform should stocks decline further.
For the bulls
For the bulls, consider this chart of the relative performance of Homebuilders against the market (top panel) and the stock market (bottom panel). Homebuilders bottomed out on a relative basis last October and they have been rallying on a relative basis ever since. Currently the group is testing a relative support level, but the relative uptrend remains intact. The Fed's QE3 program specifically targets the MBS market, which should benefit the housing sector. This is a signal to get long and don't fight the Fed.
Click to enlarge images
A similar analysis of the gold miners showed this group rallied through a relative downtrend line in late August and they have been in a relative uptrend ever since. Gold should benefit from the latest trend of quantitative easing by central banks around the world, which amounts to competitive devaluation that benefits the value of gold as an alternative currency.
Defensive leadership for the bears
In choosing sectors as candidates for investment, I like to see secular leadership independent of market direction. Telecom, which sports a higher than market yield, is usually thought of as being somewhat defensive in nature. Nevertheless, this sector has been leading the market since May. It remains in a relative uptrend and did not lag when the stock market began to run in June. This sector, along with the Homebuilders analyzed above, form the secular leadership in the stock market.
For bearish investors looking for the leadership that is likely to outperform in a down market, Health Care is a leading candidate. The sector has been rallying on a relative basis in the current sideways consolidation period. Should the market go lower, it will likely emerging as a leadership sector.
While I personally remain bullish for now, I have four suggestions for both bulls and bears alike in the construction of their portfolio.
Pick your poison.
Disclaimer: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.