We just added new tools to analyze sector allocation on our U.S. Economics Monthly research. As of March 2010, the four sectors with highest momentums are consumer discretionary, industrials, technology and financials but that last one is starting to lose some steam (1 to 4). Can we expect these market outperformers to keep being the winners of the next 12 months? What is history telling us?
Chris Puplava from FSO also wrote about sector allocation this week and he said:
"Current leading economic indicators (LEIs) appear to be topping and such an event should have broad implications for sector leadership going forward. Quite fortuitously, the defensive sectors that outperform when the LEIs are turning down are deeply oversold on a relative basis versus the S&P 500."
Is he right? To answer all these questions, we adopted a similar approach. We started looking at ECRI Weekly LEI Y/Y and CB LEI Y/Y peaks between 1975 and 2010. We noticed there is a difference of peaks between these indicators, they do not seem to coincide. We found out CB LEI Y/Y provides the best signals for sector allocation purposes so we decided to discard ECRI Weekly LEI Y/Y from this analysis.
We charted below all peaks on CB LEI Y/Y and we calculated sector breakdown returns one year later.
Source: Emphase Finance
| LEI PEAK | ENRS | INDU | UTIL | TELS | CONS | COND | MATR | INFT | FINL | HLTH |
| 02/1976 | 27.2% | 16.0% | 7.7% | 6.0% | 1.8% | -18.7% | -7.0% | -10.8% | 5.9% | -9.0% |
| 06/1983 | 2.5% | -4.3% | -2.6% | -5.1% | 8.4% | -5.7% | -7.4% | -18.4% | -16.8% | -15.9% |
| 11/1992 | 10.9% | 14.0% | 9.4% | 18.6% | -7.7% | 14.8% | 8.0% | 15.8% | 10.2% | -14.1% |
| 03/2004 | 44.1% | 15.2% | 19.9% | 1.8% | 1.0% | 4.5% | 14.8% | -3.0% | -3.4% | 0.1% |
| LEI PEAK | ENRS | INDU | UTIL | TELS | CONS | COND | MATR | INFT | FINL | HLTH |
| 02/1976 | 1 | 2 | 3 | 4 | 6 | 10 | 7 | 9 | 5 | 8 |
| 06/1983 | 2 | 4 | 3 | 5 | 1 | 6 | 7 | 10 | 9 | 8 |
| 11/1992 | 5 | 4 | 7 | 1 | 9 | 3 | 8 | 2 | 6 | 10 |
| 03/2004 | 1 | 3 | 2 | 6 | 7 | 5 | 4 | 9 | 10 | 8 |
Source: EMphase Finance
Conclusion
Sectors that outperformed when bear market ended are expected to take a break as their reward to risk diminished. On another hand, sectors that underperformed during the economic recovery and the beginning of early stage expansion outperformed all the others following CB LEI Y/Y peaks. These sectors are energy, industrials, utilities and telecom. Sample is small but tested on nearly four decades.
Sources
BB, BC, BEA, BLS, CB, CBO, CBOE, ECRI, FHFA, FRB, GOOG, GSCI, ISM, MBA, MC, NAHB, NBER, S&P.
