Sectors give picture of U.S. market struggles
One of the best ways to evaluate what is occurring with the economy and with the financial markets is to examine market sectors. One of the great benefits of exchange-traded funds (ETFs) is that you can find one for virtually every segment of the financial markets, domestic or international. There are currently more than 640 ETFs. That’s about double the number of a year ago and more are being added all the time.
When I try to assess what is going on with the economy, I like to look at all the ETFs and rank their performance over short periods of time. Many advisors tend to look at very short time frames like two weeks or 30 days because they want to catch any moves as quickly as possible. I am generally interested more in changes of long-term trends more than short duration moves. For that I look at performance over three or six-month periods.
Currently, the sectors that are performing best over the past three months include China, energy, gold and emerging markets like India and Latin America. But while the performance numbers for some of these sectors are impressive, the numbers alone do not tell the whole story. After looking at the numbers, I then look at charts to see the patterns behind the numbers.
For example, take a look at the chart below. It shows the performance of some of the sectors above over the past six months. The blue line is SPDR S&P China (GXC), which has returned 39.5% over the past three months. But as you can see, over the past two months the fund has seen significant losses–something that does not show up with strictly a numerical performance evaluation. All of the gains occurred earlier and I would not want to take a position in this fund right now.
The brown line is iPath S&P GSCI Crude Oil Tot Ret Idx ETN (OIL). It is up 18.8% over the past three months and more than 45% over the past six months. It is definitely in an uptrend and looks like a good candidate for purchase.
The black line is StreetTRACKS Gold Shares (GLD) which is up 14.4% over the past 90 days. Over six months this fund has about the same return as GXC, but with much lower volatility. It also appears to be in a sustained uptrend.
Finally, the gold line is the Nasdaq. It peaked at the end of October and has declined since.In fact, this U.S. index hasn’t produced any postive return over the past six months and does not appear to have any upward momentum right now.
The bad news for investors is that if they are looking for somewhere to put money right now, energy and gold might be the best bets, but these sectors are notoriously volatile. Those holding long positions in the U.S. equity markets might think about selling some of those positions.
Right now this exercise portrays a U.S. market that is struggling. In an uptrend we would expect to see many market sectors showing double-digit returns over the past six months. Instead, there are virtually no U.S. sectors with that kind of performance, other than energy and gold as we already mentioned. While housing and mortgage problems are getting a lot of the blame for weakness in the U.S., the reality is that the $100 a barrel price for oil is also largely responsible. Unless that situation changes, it will create strong inflationary pressure, making it difficult for corporations to earn profits and difficult for the Federal Reserve to follow through with more interest rate cuts.
This is certainly a situation that bears watching over the next few weeks.
F.S.
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