Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The nature of this rally in its ‘exclusivity’ has been quite striking. While I said near the turn of the year we needed to see a broadening into new sectors for the rally off the December 19th low, I – nor anyone – could anticipate how things turned on a dime in terms of sector rotation. One does not expect the previous sector leadership to completely be abandoned in lieu of the new sectors – instead the general playbook is a broadening of strength with new groups taking the baton from the old, but both (the old and the new) doing well in a relative sense Usually all most groups will participate in a broader market upswing, but that has not been the nature of this leg of the rally; it has all happened in 3 broad sectors. These were of course the laggards of latter 2011 so you had to do a complete flip out of the winning sectors and into the laggards – or have a very difficult time generating any performance.
Let me show you graphically (using sector SPDR ETFs) how mutually exclusive this rally has been thus far.
This first graph is roughly a 5 week period leading up the December 19th bottom – one can see the defensive sectors leading: consumer staples, healthcare, utilities. All other groups were either flat or sharply negative.
[click to enlarge]
While not broken out below (as the chart is from Dec 19th forward), the first week or so if this move off the Dec 19 bottom actually was focused on the same groups listed above – hence the underperformance seen below since Jan 1 in utilities and consumer staples is even worse than the chart shows. Then on the turn of the year it is as if a light switch went on and all the money was moved into the new 3 new winning sectors: financials, materials, and industrials. All of this movement has essentially been post Jan 1.
[click to enlarge]
If you are like me, staring at a gaggle of stocks (many former leaders of late 2011) on watch lists that are (a) doing nothing or (b) retreating in 2012 – while the broader indexes continue to either move sideways (6 sessions this year) or gap up (2 sessions this year) – this is your explanation. If you are not positioned in this select group of sectors, you have had little to no opportunities of late to make money on the long side. Worse, anyone who shorted “weakness” coming into the year received a double whammy. 2011′s “weakness” is where the money has been made thus far in 2012 – almost exclusively.
Side note – it is strange that technology, as a broader sector, has been flat in 2012 – as it would generally move with the ‘growthy’ sectors that have been this year’s favorites. It looks like whatever strength has been seen in semiconductors (a very cyclical group) has been offset by weakness in other areas such as software. Energy has also generally been a laggard in 2012 relative to materials (generally they move together); another quirk of this new year rally.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
