Chart of the Day – What Does Sector Performance in May Predict for June?

by Enis June 1, 2012 7:04 am • Commentary

I like charts that cut through the noise.  Because each and every day, we are confronted with endless headlines, news stories, and opinions, the vast majority of which are just random noise.

For example, it was widely cited yesterday how bad stocks performed in May, with the S&P 500 index down more than 6% on the month.  But I prefer to look “under the hood” of the index to see what clues this market might give for its future performance, based on investors’ positioning.

Today’s chart comes courtesy of the fine folks at StockCharts.  It shows the Sector Performance of the U.S. market in May:

3 main takeaways for me:

  1. The strength of the defensive sectors is not that surprising, BUT the magnitude of their outperformance relative to cyclical sectors is actually quite incredible.  It indicates an extreme bid for safety among large institutional investors.  It also probably shows us that big players were loaded up on cyclical sectors after the strong start to the 1st quarter.  I have a feeling that painful unwind (selling cyclicals) is likely to continue as a result.
  2. Financials were the worst performing sector, with energy a close second.  With enormous financial stress emanating from Europe, financials weakness is to be expected, and my BMO trade yesterday was a way to play a name that has yet to catch-up to that theme.
  3. Consumer discretionary was the only cyclical sector that outperformed the S&P 500 by more than 0.25%.  It’s also the main primarily domestic cyclical sector.  A clear indication that slowing global growth is driving this selloff rather than anything specific to the U.S.  But beware the Remix.

With those points in mind, the sector performance in May predicts a continuation of market weakness.  Keep a close eye on underlying sector shifts in the first couple weeks of June to see if the tone “under the hood” is showing signs of a turn.