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Timing The Market With Sector Analysis - Week Ending June 17th, 2016 - Defense Is The Play

|Includes: Materials Select Sector SPDR ETF (XLB), XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY

Overview:

The defensive posture that began at the start of June is in full force. The only core sector to finish positive for the week on an absolute basis was the Utilities sector (+0.78%). All the remaining eight core SPDR sectors finished in the red. Health Care was the worst performing sector on the week (-2.00%). Health Care's weakness was disappointing after its initial strong performance in late May and early June.

Financials also continued to weaken. Money is also rotating into bonds (risk-off), thus driving down yields. Lower yields have a negative impact on the banking sub-group, which is one of the larger components of the Financial sector. Financials is also the second largest component of the S&P 500, helping to drive the S&P index to a negative weekly finish (-1.19%). Financials are also one of the four economically-sensitive sectors.

Technology, Industrials and Cyclicals also finished negative for the week (see first chart). That means all four of the aggressive (economically-sensitive) sectors were down on an absolute basis for the week ending June 17th. This is clearly a market playing defense and warrants caution, raising cash is prudent at this point.

The next chart is the relative performance for the core sectors for last week using the S&P 500 as the benchmark. The Utilities sector was still the leader. One encouraging sign was the positive relative performance of both the Cyclicals (Consumer Discretionary) sector and the Industrials sector. Both are aggressive sectors whose participation is necessary for the bull market to regain its footing.

Cyclicals have been a laggard for most of the year (especially in the footwear and clothing retail sub-groups). Part of last week's relative outperformance may have been due to the large spike in Linkedin (LNKD) with its announced takeover by Microsoft, but it is worth making note of going into next week. Linkedin is a member of the business training industry group, a sub-group of the Cyclicals sector.

The Industrials sector relative strength was due to the positive performance in both the diversified industrials and the delivery services subgroups. The positive relative finish by the sector was encouraging considering that the airlines sub-group took a drubbing last week (-9.4%). The airlines' drubbing may have been due in large part to last week's terror attacks (Orlando and Shanghai) and could prove to be only a temporary selloff for the carriers.

Healthcare's weakness last week can mainly be atrributed to the biotech group, which was down 3.26% for the week. The other medical related groups were negative on the week as well (see next chart).

Insights:

We are certainly seeing a defensive posture in the market since the beginning of June. Utilities and Consumer Staples are the leading sectors (see next chart). There are a lot factors at play driving this risk-adverse posture - we are in a seasonally weak period, the Brexit vote is on the agenda this coming week (Thurs.), the specter of negative and historically low interest rates in foreign markets, as well as the looming Presidential election here in the U.S.

The strength we started to see in Technology in May, driven by the surge in the semiconductor group, appears to be waning as well. The semiconductor group is only down 1.25% for June (it was up ~ 8% for May). The internet sub-group was one of the largest drags on Tech last week, primarily due to Alphabet's (NASDAQ:GOOGL) 3.95% decline on negative news regarding search spending.

Summary:

The defensive (risk-adverse) posture of the market is clearly telegraphing a clear message, Get Defensive (hopefully you have already heeded this warning based on my previous blog posts). The volatility index (VIX) has been rising since the beginning of the month (+38.8% for June). The best approach at this point is to raise your cash level, and have it handy when the dust clears post-Brexit. Sell your laggards and protect profits on your winners.

Previous Instablog's for Reference:

Timing The Market With Sector Analysis - Week Ending June 10th, 2016 - "Brexit" And Negative Rates Weigh.

Timing The Market With Sector Analysis - Week Ending June 3rd, 2016 - Healthcare Rising.

Timing The Market With Sector Analysis - Week Ending May 27th, 2016 - Technology Is Regaining Its Leadership.

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