Every market cycle has its upside leaders and downside leaders. The current intermediate cycle began its rally with strength in Utilities, followed by Telecom and Consumer Staples. Utilities was unique during January’s market correction—it was the only sector able to prevent its momentum from turning negative. However, it didn’t earn its leadership title by simply falling less than the others. Instead, Utilities surged from late January to late March, and pulled the rest of the market higher.
Eventually, all sectors joined in, but the rewards were not equally shared. Consumer Staples was not able to maintain the tempo set by Utilities, and it eventually became the laggard. It was in fact moving higher throughout this period, and although its pace was much slower than the rest of the field, its momentum did not turn negative.
Today, Technology has the dubious distinction of being the first sector to lose its positive momentum, and it is now providing the downside leadership. Its decline has not been too drastic at this point, having only given up about 6%. However, its upside move only lasted two months and was unimpressive. Therefore, it didn’t take much downside pressure for Technology to lose the little momentum it had.
Occasionally, isolated selling will victimize only one sector. That type of situation is rare, though, and investors should prepare for additional sectors to fall. One way to help determine which ones are vulnerable is to examine the lowest ranked and fastest falling sectors. For today’s rankings, Health Care is in the unfortunate position of being both—it is next-to-last in the rankings and got there by falling four places in the past week.
It’s the heart of first-quarter-earnings season, and a review of what has transpired can sometimes help one understand the market’s reaction. For Technology, 73% of reporting companies have beat expectations, 2% have matched, and 24% came in below expectations. Given that the sector’s earnings were expected to drop by 4.9%, these reports do not seem all that negative. However, another data point that may be a factor is the 44% of Technology companies that missed revenue expectations, including Apple, the largest Technology firm.
Everything is relative, including earnings expectations. Compared to Technology, Health Care looks relatively—well—healthy. Only 11% of reporting Health Care companies have fallen short on earnings, and 29% missed on revenue. Granted, 151 of the S&P 500 companies have yet to report, and they could change these numbers dramatically. The Utilities sector has been the worst at missing expectations so far this quarter: 43% have missed on earnings, and a whopping 93% have fallen short on revenue. Despite this fact, it was the best-performing sector over the past week. Investors are obviously looking at something else.
The most noticeable change to this week’s sector rankings is that Technology has slipped into the red. Its momentum had weakened substantially in last week’s update, as it clung to a ninth-place ranking. Increased negativity has now pushed it to the bottom. Back at the top of the stack, Energy holds a commanding lead for a second week, and Materials is firmly in second. Telecom regained two spots, breaking up the smokestack trio of Energy, Materials, and Industrials in the process. Industrials did not fall far, though, easing just one spot lower to fourth. Utilities, which fell out of favor in late April, bounced back strongly and moved five places up to fifth. Other defensive sectors also improved, with Real Estate moving two steps higher and Consumer Staples climbing out of the basement. However, Health Care continues to dissociate itself from the defensive group, sliding four places lower to tenth.
As suggested last week, Small-Cap Value’s volatility worked against the category and forced it to relinquish its top ranking after just one week. Mid-Cap Value, which held the top spot for the seven previous weeks, has resumed the leadership role. All style categories lost momentum since our last update, but there were still winners and losers in the rankings. Large-Cap Value moved two spots higher, and Mid-Cap Blend followed close behind. This places all three Value categories at the top. Categories falling in the rankings included Micro-Cap, Small-Cap Blend, and Small-Cap Growth. As mentioned earlier, Small-Cap Value was another category to lose ground, indicating that relative weakness during the past week was confined to the small-capitalization segment. On a longer-term basis, Mega-Cap and Large-Cap Growth are still on the bottom.
Latin America is first, Canada occupies second, and Pacific ex-Japan sits in third. This is beginning to sound like a broken record, but that is often the nature of momentum—it can be more persistent than most people realize (or are willing to admit). This is Latin America’s ninth consecutive week at the top. Additionally, the aforementioned trio of resource-rich geographical regions have been among the upper tier for the better part of a dozen weeks. During this period, the global ranking categories went from being all red to all green. Today, that conformity ends with China slipping back into the red. Japan will likely join it in the next few days, as its brief April rally abruptly ended. Located between the three leaders and the two laggards at the bottom, the six categories in the middle find themselves tightly bunched. Within this group, the U.K. and the Eurozone moved to the top of the group, while Emerging Markets and EAFE slid. The U.S. has faced declining currency headwinds since the end of November. This has been a factor in it losing its top spot in early February and its resignation to the lower half of the rankings for the past three weeks.
“ The entire complexion to this market has changed and
all signs now point to a near-term correction.”
—David Rosenberg, chief strategist at Gluskin Sheff
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