Today we’ll look at some interesting patterns in last year’s sector action — which was quite different from the broad market.  Then I will make an observation about the way 2012 is starting off.

Little Sectors Win the Year

Standard & Poor’s classifies every individual stock into one of ten primary sectors.  They then publish specific indexes for each sector (as well as dozens of sub-sectors within the ten primaries).

So let’s see how each sector performed.  Some were above-average while others lagged.

Hmmm, what’s going on here?  Only three sectors had a losing year, and one of those was off less than 3 percent.  Meanwhile three other sectors had double-digit gains.  So how did the index end up at break-even?

The answer lies in the fact the S&P 500 is capitalization weighted.  This simply means that each stock — and therefore each sector — influences the overall index in proportion to its size.

As of 12/30/2011, the stocks in the S&P 500 had an adjusted market cap totaling almost $11.4 trillion.  Now, as we did above, let’s break it down by sector.

Now the index returns make more sense.  One of the three largest sectors (Financials) dropped 18.4 percent for the year.  The other two biggies (Technology and Energy) had gains in the low single digits.

Conversely, the best-performing sectors tended to be smaller …

Utilities had a great year, but that group represents only 3.9 percent of the S&P 500′s value.  The year’s other two big winners, Consumer Staples and Health Care, are middle sized.  This pair kept Financials from dragging the whole index down.

A Good Time to Stay Defensive

Another thing to notice about last year: The winning sectors were those traditionally thought of as “defensive.”  Utilities, Consumer Staples, and Health Care are often among the best havens in a weak economy.  That was certainly the case in 2011.

Will 2012 be the same?  Of course I don’t know what will happen, but I see some clues.

Utilities had a big rally in the last two weeks of the year.  SPDR S&P Utilities (XLU) gained about 5 percent in that short period … then lost half of those gains in the first week of January.

To me, this looks a lot like year-end “window dressing.”  That’s when portfolio managers pile into the yearly or quarterly winners so their clients will think they’ve been in the best stocks all along.  Once the calendar turned, buying interest dried up and the Utilities sector fell.

Health Care, on the other hand, has shown much steadier recent results.  SPDR S&P Health Care (XLV) actually outperformed XLU in the last quarter of 2011, rising 10 percent vs 8.2 percent for the Utilities ETF.

Bottom line: Not all “defensive” sectors are always equal.  I suspect Health Care will continue to outperform.  If you agree and would like to bet on this trend, here are the five largest diversified health care ETFs to consider:

• SPDR Health Care Select Sector (XLV)
• Vanguard Health Care (VHT)
• iShares Dow Jones U.S. Healthcare (IYH)
• iShares S&P Global Healthcare (IXJ)
• First Trust Health Care AlphaDEX (FXH)

Disclosure covering writer, editor, and publisher:  Long XLV.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.  This article originally appeared in Money and Markets, a free daily investment newsletter from Weiss Research.  To view archives or subscribe, visit http://www.moneyandmarkets.com/.

I have long been a fan of sector and industry-focused funds, and I warmly welcome these products.  One of my displeasures with the popular SPDR S&P Select Sector ETFs is that they are extremely top-heavy, mostly dominated by just a few stocks.

S&P divides the US market into three major market capitalizations:  S&P 500 Large Cap, S&P MidCap 400, and S&P SmallCap 600.  Together they form the S&P 1500.  There should be no overlap between the holdings SPDR S&P Select Sector family (which only includes stocks from the S&P 500) and the new PowerShares S&P SmallCap Sector family.  In fact, there is a gap between the two families, namely the 400 stocks belonging to the S&P MidCap 400 Index.

When bought in the correct proportions, these nine new ETFs should exactly represent the S&P SmallCap 600 Index, just like the SPDR Select Sector ETFs can replicate the S&P 500 when properly allocated.  Keep in mind, however, that the sector proportions are not the same for both indexes.

The new PowerShares funds all have an expense ratio of 0.29%. Investors familiar with the popular S&P Select Sector SPDR ETFs should have no trouble learning the new ticker symbols – just add an “S” for small to the end of the SPDR ticker symbol.

PowerShares S&P SmallCap Consumer Discretionary Portfolio (XLYS) (overview) (holdings) currently has 113 holdings and represents 16.7% of the S&P SmallCap 600 Index.  The top five holdings are Tractor Supply Co. (TSCO) 2.9%, Live Nation Entertainment Inc. (LYV) 2.9%, Carter’s Inc. (CRI) 2.5%, Deckers Outdoor Corp. (DECK) 2.4%, and Polaris Industries Inc. (PII) 2.3%.

PowerShares S&P SmallCap Consumer Staples Portfolio (XLPS) (overview) (holdings) currently has just 20 holdings and represents only 3.1% of the S&P SmallCap 600 Index.  The top five holdings are Casey’s General Stores Inc. (CASY) 11.8%, TreeHouse Foods Inc. (THS) 11.0%, United Natural Foods Inc. (UNFI) 9.3%, Sanderson Farms Inc. (SAFM) 7.6%, and Diamond Foods Inc. (DMND) 5.7%.

PowerShares S&P SmallCap Energy Portfolio (XLES) (overview) (holdings) currently has 23 holdings and represents 5.2% of the S&P SmallCap 600 Index.  The top five holdings are St. Mary Land & Exploration Co. (SM) 10.3%, Oil States International Inc. (OIS) 10.0%, Dril-Quip Inc. (DRQ) 8.6%, SEACOR Holdings Inc. (CKH) 8.1%, and World Fuel Services Corp. (INT) 7.3%.

PowerShares S&P SmallCap Financials Portfolio (XLFS) (overview) (holdings) currently has 99 holdings and represents 18.2% of the S&P SmallCap 600 Index.  The top five holdings are National Retail Properties Inc. (NNN) 2.4%, ProAssurance Corp. (PRA) 2.3%, Entertainment Properties Trust (EPR) 2.2%, Tanger Factory Outlet Centers Inc. (SKT) 2.2%, and BioMed Realty Trust Inc. (BMR) 2.1%.

PowerShares S&P SmallCap Health Care Portfolio (XLVS) (overview) (holdings) currently has 79 holdings and represents 13.4% of the S&P SmallCap 600 Index.  The top five holdings are Mednax Inc. (MD) 4.6%, Salix Pharmaceuticals Ltd. (SLXP) 3.6%, AMERIGROUP Corp. (AGP) 2.9%, Cooper Cos. (COO) 2.9%, and Regeneron Pharmaceuticals Inc. (REGN) 2.9%.

PowerShares S&P SmallCap Industrials Portfolio (XLIS) (overview) (holdings) currently has 95 holdings and represents 16.9% of the S&P SmallCap 600 Index.  The top five holdings are Gardner Denver Inc. (GDI) 3.2%, Acuity Brands Inc. (AYI) 2.7%, Watsco Inc. (WSO) 2.5%, CLARCOR Inc. (CLC) 2.4%, and Toro Co. (TTC) 2.3%.

PowerShares S&P SmallCap Information Technology Portfolio (XLKS) (overview) (holdings) currently has 121 holdings and represents 18.0% of the S&P SmallCap 600 Index.  The top five holdings are Skyworks Solutions Inc. (SWKS) 3.5%, Varian Semiconductor Equipment Associates Inc. (VSEA) 3.1%, Cypress Semiconductor Corp. (CY) 2.4%, Veeco Instruments Inc. (VECO) 2.4%, and Concur Technologies Inc. (CNQR) 2.3%.  Note: the telecom sector is not included in XLKS like it is for SPDR Select Sector Technology (XLK).  Instead, the telecom stocks are included in the Utilities fund (XLUS).

PowerShares S&P SmallCap Materials Portfolio (XLBS) (overview) (holdings) currently has 30 holdings and represents 4.6% of the S&P SmallCap 600 Index.  The top five holdings are Rock-Tenn Co. Class A (RKT) 8.9%, NewMarket Corp. (NEU) 6.1%, Eagle Materials Inc. (EXP) 5.7%, H.B. Fuller Co. (FUL) 5.6%, and OM Group Inc. (OMG) 5.3%.

PowerShares S&P SmallCap Utilities Portfolio (XLUS) (overview) (holdings) currently has 14 utilities stocks and six telecommunications stocks for a total of 20 holdings.  Sector weightings within the S&P SmallCap 600 Index are 3.4% for utilities and 0.6% for telecommunications.  Therefore, XLUS is about 81% utilities and 19% telecom.  The top five holdings are all utilities: Piedmont Natural Gas Co. (PNY) 11.6%, New Jersey Resources Corp. (NJR) 9.1%, Southwest Gas Corp. (SWX) 8.0%, South Jersey Industries Inc. (SJI) 7.3%, and Northwest Natural Gas Co. (NWN) 7.1%.

PowerShares S&P Small Sector Portfolios home page

Prospectus (pdf)

Find our coverage of all new ETF and ETN introductions here.

Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Part of the concerns relates to Dubai World’s credit-worthiness. The state-owned company responsible for building Dubai scared investors by renegotiating some of their debt payment, as we mentioned in our 12/02/2009 newsletter. Apparently, the man-made islands and the tallest building of the world was not built with UAE cash. Since then, some fears have been allayed. Markets have not melted down as some analysts worried, but Financials have not yet recovered from the blow in confidence.

More recently Citigroup (C) appears to be back from the grave. Once the largest bank in the country, Citi traded near a dollar in March 2009. They’ve climbed back to an almost-respectable 4 dollar handle with the help of some friends in Washington. The fact that Citi is even being mentioned as late as December 2009 is a testament to the soft spot politicians have in their hearts for banks. Citigroup is now seeking to raise capital for a $10 billion TARP repayment. They plan to issue common stock and at $4 a share, they need to sell 2,500,000,000 shares. Investors may now be remembering how bad off some banks were before the TARP infusion.

It’s also possible that some of the good caused by TARP and bailout money has run out of steam. Government spending has not slowed, but recession-wearied, sometimes-jobless consumers are not borrowing and making payments on as much as they used to. Unemployment is still a solid 10%, and that’s not counting the discouraged workers no longer looking for work or underemployed millions. As a result, Financials largest players have had a tough month. Banks with big consumer exposure have not fared well this holiday season: As of Friday, Wells Fargo (WFC) was down 12%, JP Morgan-Chase (JPM) down 8% and Bank of America (BAC) was down 5.5%. If you want to go long for a particular sector, then think twice about buying Financials at this time.

Disclosure covering writer, editor, publisher, and affiliates: Long JPM. No positions in any of the other companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Still, the US economy is dependent on US consumers.  Consumer spending still accounts for 70% of the economy.  With unemployment still rising and house values continuing to decline, it may not be best to go ‘all-in’ quite yet.  That’s why we’re looking at one area not directly tied to consumers: Materials.

The materials sector is closely tied to commodities.  As commodities rise, materials stocks often move in tandem.  If the US economy is stabilizing, we see some healthy potential for materials.  For one, it was one of the hardest hit sectors in the global slowdown.  It stands to gain the most in a global recovery.  Second, of the 9 S&P sector SPDRS, it has risen the most in the past month.  Third, commodities will be needed as the global economy recovers.  There are a few ways to capitalize on Materials rising.

Materials Select Sector SPDR (XLB) is the traditional materials ETF.  Comprised of US-based stocks, XLB holds companies like Monsanto (MON), DuPont (DD), and Newmont Mining (NEM).  Like many ETFs, XLB closed above the 6/12 high on Friday.  We expect this momentum to continue in the near future.  If you’re looking to profit in US-materials, XLB is the way to do it.

Vanguard Materials ETF (VAW) is the low-cost way to get US-materials exposure.  With a total expense ratio of 0.2%, it’s about a quarter of the size of XLB in total assets.  VAW has a similar upward trajectory as it’s big brother, XLB.  In addition to XLB’s main holdings, VAW holds Praxair (PX), Nucor (NUE), and Dow Chemical (DOW) in its top-10 holds.  If you’re looking for a more-steady ride in US-materials, VAW could be a better bet.

iShares S&P Global Materials (MXI) is the global high-volume materials ETF.  MXI holds similar stocks as XLB with global companies like BHP Billiton (BLT.L), Rio Tinto (RIO.L), and Anglo American PLC (AAL).  Although MXI has yet to follow XLB’s breakout, it’s on a more steady uptrend compared to it’s US-only counterpart.  If you’re looking to profit from global materials, MXI is the broad-based way to go.

You could always go deeper in the ETF realm.  If MXI doesn’t fit you’re your style, you could trade a newer, more concentrated product like the one we mentioned last Wednesday: EMT. Emerging Markets Titans Metals & Mining Fund (EMT) focuses on emerging markets metals and mining stocks – a solid materials play.

Disclosure:  no positions

In that vein I offer a similar silver lining. As many companies struggle to remain profitable, some are still doing well. In fact, year-over-year growth continues for one such subsector that suffers from two market-driven biases. For one, it’s technology-based. Many investors still remember the tech crash of the early 2000s. With long-memories, investors are reluctant to take on large positions in technology. Second, the current economic environment skews investors’ outlook to the negative. Sure, growth is possible. But why bet the farm now?

Although I don’t recommend anyone take a second mortgage, I am encouraging you to consider an attractive area of technology: cloud computing. “Cloud” is a metaphor for the internet. And despite hiccups along the way, the internet is still a source of tremendous potential for many decades to come – hence the reason to consider investing in cloud technology.

More specifically, cloud computing encompasses both software-as-a-service (SaaS) and software-as-a-platform applications. It’s where companies buy subscriptions to external servers and software – hence saving the expense of in-house hardware and IT support. Many businesses are moving to such services as the cost of maintaining servers and staff rises. Cloud computing answers the old question: why buy technology that will be obsolete in a few years when you can rent and always be up-to-date?

One of the more successful SaaS applications has been Salesforce (CRM). Their cloud computing interface is Salesforce.com. Their customer relationship software allows businesses to manage customer interactions from an ordinary web browser. Basically, it’s an on-demand application for businesses who don’t want to buy and maintain expensive CRM-software.

As companies look to reduce initial outlay for servers and pare down payrolls, cloud computer services like Salesforce.com will become more compelling. According to research firm Gartner, in 2008 approximately 10% of software application spending by businesses worldwide was provided over the internet (the cloud), a major increase increased over the last decade. I expect this trend to continue for the long term.

Companies that provide these services and the infrastructure to carry them are becoming increasingly attractive. Vendors such as Citrix (CTXS), and VMware (VMW) provide the backbone for cloud computing services, as does a division of Amazon (AMZN).  Other companies supply the user interface: Salesforce (CRM), Netsuite (N), and Google (GOOG). If any of these companies match up with your overall strategy, it might be a good time to consider an investment.

]]> http://investwithanedge.com/growth-in-technology-cloud-computing/feed 2 http://investwithanedge.com/market-momentum-for-2-19-09 http://investwithanedge.com/market-momentum-for-2-19-09#comments Thu, 19 Feb 2009 22:00:14 +0000 Ron Rowland http://investwithanedge.com/?p=3444 Market momentum is strong – strongly negative.  The Dow Jones Industrial Average closed at a new 52-week (and six-year) low today.

Sectors

Health Care is atop our sector rankings but is having trouble getting past resistance formed by highs of the last four months.  Technology is holding onto the # 2 spot and is still holding above its January lows.  Utilities are in third place but broke down significantly in the last week.  In fact, every sector is in some stage of breakdown.  Even Consumer Staples seem to have lost their “defensive” allure.  Financials, Industrials, and Materials are still on course for oblivion.

Styles

Extremely bearish negative momentum.  A pattern is taking shape in the Style Edge rankings: the three Growth categories are on top while the three Value categories are on the bottom.  Large Growth, Mid Growth, and Small Growth are all holding above the January lows.  Their Value counterparts are more of a mixed bag, with Large Value looking more vulnerable than Mid Value and Small Value.  The previously strong (on a relative basis) Mega Caps are now straddling the midline of our rankings.

Global

World markets are still showing extreme volatility.  China is rolling over to the downside again, while Japan and the rest of Asia are plumbing new depths of despair.  Latin America is still the best region but keeps hitting resistance, similar to the Health Care sector action.  Canada is unable to sustain a rally while the U.K. and EU are breaking down further.

For additional information on how to read and interpret the charts, please consult our User’s Guide.  This weekly analysis is available with free subscription to Invest with an Edge.

Exchange Trade Notes are suffering from concerns of default risk.  The Lehman Brothers bankruptcy, which resulted in the demise of three ETNs, is causing investors to hesitate before throwing money into these products.  Unless ETN sponsors to take steps to calm investor fears, their representation on the list is likely to grow in the coming months.

NETS PSI 20 Index Fund (LIS) tops the list for the second month in a row.  It is an ETF designed to track the performance of the PSI 20 Index of Lisbon, Portugal.  Total volume for the month of December was 900 shares.  Although this represents a huge percentage increase from the 211 shares traded in November, it wasn’t enough to improve the fund’s ranking.

NETS has 15 ETFs that track single-country stock exchanges.  Unfortunately, 12 of them are on deathwatch today, and the other three just barely escaped.  In most cases, these are unique and potentially great products.  However, investors don’t seem to know they exist.  If they are to have a chance at surviving, NETS needs to step up their marketing efforts.

The SPA MarketGrader products are in huge trouble.  They have a total of six ETFs and all six of them are on deathwatch.  Once again, these are potentially good products, but marketing efforts have failed to attract any attention.

ETRACS is another group in dire straits with nine of their ten products on the list this month.  ETRACS also has to overcome ETN credit concerns since all ten of their offerings are ETNs.  The Elements offerings are in a similar situation.  All their products are ETNs also, and ten are on deathwatch this month.

XShares continues to struggle.  They shut down all 26 of their HealthShares and Adelante Real Estate Shares in 2008.  The have four remaining products under the TDAX brand, three of which are on our list.  Claymore also saw a large number of ETF closures in 2008 yet has another 19 on the list this month.

The reason for so many products being on the list is simple – too many arrived too quickly for the market to absorb.  For the most part, these products are not suffering from poor design;  they are suffering from investor overload and marketing failures.  There will be a day in the future when 1,000 ETFs are not enough.  For now, 800 is proving to be far too many.  There will be further casualties.

Note:  The dubious distinction of being included on the list below is reserved for U.S. listed ETFs and ETNs that have been available for at least six months, and their Average Daily Value Traded (ADVT) for the most recent calendar month was less than $100,000 per day.

ETF Deathwatch January 2009

Much of the day’s action hinged on an auction being held among derivatives dealers to settle contracts related to the now-defunct Lehman Brothers. There was fear that other banks might be forced into liquidation, but it appears all the firms involved were able to meet their obligations. Financials ended the day as the best-performing sector. Real estate and transportation stocks also got a bounce, while energy, utilities and health care added to their losses. The S&P 500 had its worst week since 1933 while markets around the world broke similar records.

Today’s slightly encouraging conclusion aside, the global financial problems are far from over. Inter-bank lending is still frozen and massive liquidity injections by central banks are not helping. In fact, they may be making things worse. Today we saw some anecdotal reports that cargo is piling up in seaports because ship-owners are unable to get the bank letters of credit that finance their shipments. This is a sign that the credit crunch is spreading into the broader economy.

President Bush’s reassuring public statement was widely covered by the media, but at this point it is unclear how many investors actually care what he has to say. This weekend the leaders of the G-7 industrial nations are meeting in Washington and are expected to issue some kind of joint statement about the credit crisis. Unless it is accompanied by some kind of miracle cure – and we can’t imagine what that would be – this statement is also unlikely to be helpful.

What will Monday bring? One glimmer of hope was today’s +4.7% gain in the Russell 2000 Small Cap Index. The Nasdaq Composite also made a fractional profit for the day. If small caps can gather some momentum, the Dow and S&P 500 may be able to follow soon. On the other hand, the fundamental economic conditions that got us in this mess haven’t changed. Housing prices, unemployment, consumer spending, and industrial activity all point to a deep global recession. Hence any rally from here is likely to be shallow and short-lived. Those with gray hair will recall that the 1987 Crash was followed by months of grinding, frustrating, and generally difficult market action. We won’t be surprised to see the same this time. Hopefully, there will be a few sector trends for us to trade.

But last week the flotsam was the rapidly-falling price of crude oil, which ended the week at its lowest point in five months. Isn’t lower oil good news? In some ways, yes. The problem is that oil is getting cheaper because demand is falling. Demand is falling because the global economy is slowing down. When a growing number of people are not driving as much because their jobs that don’t exist anymore, of course fuel prices will fall. It is simple supply and demand.

Friday’s report on non-farm payrolls was dismal indeed. It appears that some 84,000 jobs may have disappeared in August. We say “may have” because this statistic is subject to dramatic revision. Last month, for instance, the government statisticians initially reported a loss of 51,000 jobs in July, but they have now revised this figure to 60,000. The June figures changed even more dramatically, to a loss of 100,000 jobs from -51,000 originally. Add it up and so far in 2008 some 605,000 jobs have disappeared, and the official unemployment rate now stands at 6.1%. Here again, the real number is probably quite different. People who have given up looking for a job, or people who hold part-time jobs but would like to work full-time, are not included in the statistics.

Not coincidentally, mortgage delinquencies and foreclosures are on the upswing. It seems that unemployed and underemployed people often have difficulty making their mortgage payments. According to the Mortgage Bankers Association, 6.41% of all mortgages were delinquent on their payments as of the end of June. If you zero in on subprime mortgages only, the delinquency rate jumps to 18.67%. As of June 30, 11.81% of subprime mortgages and 2.75% of all mortgages were in the process of foreclosure.

Given all this, it is fair to ask why the financial sector was one of the few corners of the market to show a gain in the holiday-shortened week? It does seem odd. Most of the gain came in a big jump on Tuesday; the rest of the week brought steady deterioration until a surge unfolded on Friday. This suggests that dollar strength and falling energy prices were beneficial to the financial sector.

Today, the markets reacted positively to the U.S. government GSE-buyout. The Dow was up 234 points or 2.1% at the time of this posting. Historically, post-intervention rallies have not been sustained over the past 13 months. We will see if this one is different. Regardless of the effect, this is the largest intervention of it’s kind since the recent market mahem commenced.

photo credit: wickenden

Case in point: Rising gas prices have forced debt-burdened consumers into a corner. The weekly fill-up at the pump has jumped substantially in the past couple of years. According to official reports, consumers are paying +41% more for gasoline this year than they were in 2006. With the house ATM (aka, home equity loans) running low on funds, consumers are forced to borrow from other places to finance daily trips down the highway. ‘Rob Peter to pay Paul’ has become a way of life for the American consumer.

That’s why it’s not surprising this came out today. Bloomberg reported for the first time since 1982, consumers spent more for gasoline than for new cars. In June, gasoline accounted for 4.4% of consumer spending versus 3.9% for automobiles and motor parts. This is a startling find, although not completely unexpected.

Even though gas has been trending down over the past few weeks, the broad economic effects have been felt in other areas. It has hit consumer discretionary especially hard, where automakers reside. In the past 52-weeks, that sector has fallen -11.7%, where the S&P 500 is only down -7.5%. The immediate results can be seen in high-profile bankruptcies: Sharper Image, Linens & Things, Mervyn’s, etc. Now we see the effect in automakers. People don’t want to buy new cars when they can’t afford the gas they put in their old cars. It’s simple economics.

The bigger question is how long this will last. Trends are pointing against discretionary at the moment, but trends can change. Six weeks ago, trends pointed towards energy and materials — My what a difference a month can make. This week, we’re staring at a +0.5% rise. Next week we could be down half-a-percent. Momentum shifts daily as the market decides what to do. That’s what makes this business interesting…and yes, sometimes painful. At least falling gas prices are lessening the sting of a volatile market. Let’s hope this trend continues.

Have a great weekend.