Looking for a Bottom? Start with Sectors

With the US equity market recently hitting a new 52-week low, investors are still waiting for the market to bottom out.

However, clear differences are starting to emerge between the sectors as some groups have stayed above the low watermarks achieved on October 10.

The S&P 500 ETF (SPY) set a 52-week low of $82.09 on November 13.  Comparing sector lows on November 13 to other recent bottoming days of October 10 and October 27 reveals that 4 of the 9 major sectors may have already hit bottom.

October 10th Group – Safe to Get Back in the Water

October 10 was the 7th straight day of a sell-off when the market bottomed preceding a large bounce-back by the end of the next trading day.  On October 10, 4 sectors achieved 52 week lows:

Energy Select Sector SPDR Fund (XLE)

Consumer Staples Select Sector SPDR Fund (XLP)

Health Care Select Sector SPDR Fund (XLV)

Utilities Select Sector SPDR Fund (XLU)

The real test for this group came on November 13 when the overall market (SPY) set a new 52-week low.  On that day, XLE’s low was 11% higher than its 52-week low set on October 10.

The other three sectors also stayed well above their October 10 lows: XLP (+4%), XLV (+7%) and XLU (+17%). Although hitting interim lows on October 10, the 5 remaining sectors have gone on to even lower levels.

Conclusion: The four sectors that set 52-week lows on October 10 are now clearly outperforming the rest of the market and should receive preference over their peers.

November 13th Group – Wait and See

Three sectors hit their 52-week low on November 13:

Technology Select Sector SPDR Fund (XLK)

Industrial Select Sector SPDR Fund (XLI)

Consumer Discretionary Select Sector SPDR Fund (XLY)

The Materials sector actually hit its 52-week low on October 27. However, the intraday low on November 13 was only slightly higher indicating that Materials should also be part of this group.

Materials Select Sector SPDR Fund (XLB)

Conclusion: The four sectors that set or came close to 52-week lows on November 13 still have the potential to go lower.  The next sell-off in the market should provide more insight on this group.

November 18th Group – Still Going Down

On November 18, the market experienced another sell-off although SPY stayed about 1% above the November 13 low.

One sector, financials, set a new 52 week low and clearly remains in a down trend.

Financial Select Sector SPDR Fund (XLF)

Conclusion: The financial sector has yet to hit bottom.

– Michael Vermillion

November 19, 2008