Current Sector Statuses and What They Can Tell Us

With the sharp selling we saw on Monday and Tuesday, some analysts and institutions were declaring that we are in a bear market while others were still saying that we are in a correction. Personally, I don’t really care to waste time on such a distinction. I would rather try to figure out where we are going next and how can I protect and grow my assets and help readers do the same.

One thing I started looking at was the status of all of the different S&P sectors according to their long-term moving averages. I am a little unorthodox in terms of the moving averages that I use compared to what other investment analysts use. I prefer meaningful numbers rather than round numbers. For instance, when it comes to weekly charts, I look at 13-week moving averages, 52-week moving averages, and 104-week moving averages. These numbers represent one quarter, one year, and two years.

I believe investors can avoid big losses by paying attention to these moving averages, whether it is individual stocks or ETFs or by paying attention to the overall market. If a stock drops below its 52-week moving average, maybe cut your holdings in half. If the 13-week moving average makes a bearish crossover of the 52-week, get out completely.

When it comes to the overall market, I expressed some thoughts on this subject in an article about asset allocation in October.

In an effort to see where we stand now I looked at the Exchange Traded Funds that represent the 10 main sectors to see where they all stand in terms of their long-term moving averages. I put together the following table to help make it easier.

What we see in the table is that seven of the 10 sector ETFs are below their 52-week moving averages at this time. Four of the 10 are below their 104-week moving averages already. The only three that haven’t dropped below the respective 52-week are consumer staples, healthcare, and utilities —the defensive sectors.

I also looked to see which of the sector had already seen their 13-week moving average cross bearishly below their 52-week moving average and there were four of those—basic materials, communication services, energy, and financials.

In order to try to learn from this and arrive at a conclusion that could help investors, I looked back at the bear market from 2007 to 2009. I looked at the sectors and how they performed back then. Which sectors were the first to see bearish crossovers in the moving averages? Which were the last ones to make a bearish crossover?

The bear market from 2007-09 and turned in to the “financial crisis” started when the credit markets locked up. This made it difficult for borrowers and banks alike, so it isn’t surprising that the first sector that showed signs of problems was the financial sector. The sector ETF (XLF) saw its 13-week moving average cross below the 52-week moving average in August ’07.

The next sector to see the crossover was the consumer discretionary sector in September ’07. The rest of the sectors saw the bearish crossovers take place in 2008. Two of the last sectors to see the bearish crossover were consumer staples and utilities.

In addition to looking at the sectors, I looked at the S&P 500, the Russell 2000 and the Dow Jones Transportation Index to see when they saw their moving averages making bearish crossovers. I wrote about the transportation index and the Russell back about a month ago and how they can have predictive capabilities about the rest of the market.

In the last bear market, the S&P saw its 13-week cross bearishly below its 52-week in January ’08. The transportation index and the Russell both saw their 13-week moving averages move below the 52-week in October ’07.

Right now, the transportation index is below its 52-week moving average and above its 104-week. Its 13-week moving average hasn’t crossed below the 52-week yet, but it is getting close.

As for the Russell, it is also below its 52-week moving average, but it is dangerously close to dropping below its 104-week at this point. If we continue to see selling this week, the 13-week moving average could cross below the 52-week as early as this week. Even if we see a rally and the moving averages don’t cross this week, it is likely to happen next week.

So what does all of this mean to you? We are dangerously close to entering the next bearish phase of the market. We are seeing weakness across the board and it has been somewhat methodical—the defensive sectors are still serving their purpose and attracting assets as investors flee other sectors.

From the high in October 2007 through the point in January 2008 when the S&P saw its moving averages make a bearish crossover, the index lost just under 20%. Right now we are less than 10% off the high in September. Will we see the selling continue into December and January? If we do, you will likely see bearish crossovers in the moving averages of most of the sectors and from the indices.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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