Tuesday, June 10, 2014

* Sector Rotation: Is it a Myth? Health Care, Technology, Materials & Financials. I Bet You Didn't Know This.

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Original Post Date: June 10th, 2014

There has been a lot of talk surrounding sector rotation in the S&P 500, which is a reference to which sectors inside the index are outperforming relative to the others.  For purposes of this brief post, I will look at:
  • S&P 500 (Index)
  • XLF (Financial Select Sector)
  • XLV (Health Care Select Sector)
  • XLB (Materials Select Sector)
  • XLK (Technology Select Sector )

It all depends on your time horizon outlook.  But, whether we look at 14-years (all-time), 5-years or YTD (just 2014), the Financial sector is the worst investment of the bunch all the time.

Similarly, across all time horizons (14-years, 5-years and 2014 YTD), Health Care is the best performing sector.

Shortcomings of the Analysis
  • I only looked at four sectors and the S&P 500 (there are more sectors)
  • I only focused on large caps (these ETF's are S&P 500 focused)
  • Financials boomed from 2000-2007 and that boom created a bubble ("too big to fail" became a colloquialism).  Looking at charts below with endpoints in 2014, hides that boom in the early portion of the time series for the sector.
Let's take a look and watch the sector rotation (myth?) in several different time frames.

First, let's look all the way back to 2000, the furthest these ETF's trade.
Provided by Charles Schwab optionsXpress

The thick blue line line is the S&P 500.
  • We can see that XLB (Materials) and XLV (Health Care) have substantially outperformed the index and the other two sectors we are investigating. 
  • XLF (Financials) is negative all-time (14-years).
  • XLK (Technology) is barely positive
So: Materials & Health Care are huge outperformers; Financials are remarkable underperformers.

Now, let's look to a five-year window.

Provided by Charles Schwab optionsXpress

Again, the thick blue line line is the S&P 500.

  • Again, XLV (Health Care) is the top performer.
  • Again, XLF (Financials) are the bottom performer.
  • XLK (Technology) barely paces the index itself.  

So: Financials yet again are the worst performing group while Health Care again is a top performer and Technology has not proven to be a noteworthy investment.

And finally, just 2014, YTD (year-to-date).

Provided by Charles Schwab optionsXpress

Again, the thick blue line line is the S&P 500.
  • For the third time, across all time horizons, Health Care is outperforming.
  • For the third time, across all time horizons, Financials are underperforming.
  • XLV (technology) is outperforming, but it is not a market leader.

This is trade analysis, not a recommendation.

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