Macro Wrap – Crowded Bandwagons and Portfolio Managers’ Pain, $XLY, $XLK, $XLF, $XLE

by Enis August 29, 2013 6:57 am • Commentary

Most professional portfolio managers, whatever their sales pitch, are in the business of chasing performance.  Their career is always more at risk if they miss the big trends than if they fail together with the crowd.  So they’re often jumping on crowded bandwagons simply because they don’t want the outperforming stocks and sectors to leave the station without them.

So the majority of portfolio managers are feeling greater than normal pain during the selloff that we’ve seen in the month of August.  Why?  The outperformers in 2013 have been more severely affected by this month’s selling.  Here is a chart of the performance of the 6 major cyclical sectors in the U.S. since the broader market’s peak on August 2nd:

Performance since Aug 2nd in order:  XLB, XLE, XLK, XLI, XLY, XLF, Courtesy of Bloomberg
Performance since Aug 2nd in order: XLB, XLE, XLK, XLI, XLY, XLF, Courtesy of Bloomberg

All 6 of these sectors are down since the high, but XLB (materials), XLE (energy), and XLK (technology) have all outperformed the S&P 500, while XLI (industrials), XLY (consumer discretionary), and XLF (financials) have all underperformed.

To start the month of August, XLI, XLY, and XLF had all outperformed XLB, XLE, and XLK by 5-15%, which is huge for relative sector performance in just 7 months.  The unwind of those concentrated positioning now seems to be occurring, which makes a 4% selloff in the S&P 500 index a much more painful experience for fund managers who had ridden the coattails of prior trends so well in 2013.

Under the surface, keep an eye on relative sector performance for a gauge of the potential for further risk-off moves.  Given this sector unwind that we’re seeing, I don’t think positioning is yet clean enough for a more sustainable market bounce.