We’re not quite halfway through the year just yet, but while doing some research for another article earlier today, I couldn’t help but think about an article I wrote for Bull Market Rodeo at the beginning of the year. I wrote the piece back in December and pointed out what I thought would be the top two sectors for 2020. Being more specific, I said I liked software stocks and banks heading into the New Year. Software is part of the tech sector and banks are part of the finance sector.
Needless to say, the market has been rather difficult so far this year with the pandemic hitting U.S. shores in February and sending stocks tumbling. At the market low in March, the S&P was down approximately 30%. Stocks have roared back off that low and the S&P has gained 40% from March 23. Even with the big rally, the S&P is still down 2.44% for the year.
While Standard & Poor’s breaks the market down into 11 main sectors, Investor’s Business Daily breaks them in to 33 different groups. Through the close on June 3, the software sector was the top performing sector. According to IBD, the sector had gained 23.11%, considerably better than the S&P and much better than the tech sector as a whole which had gained 9.25%.
Unfortunately, my prediction on the bank sector hasn’t worked out nearly as well. The banking sector ranked 32nd out of the 33 with a decline of 32.38% so far this year. The financial sector as a whole is down 18.9% so far this year.
Looking at the weekly chart for the S&P 500 Software Industry Index, we see that it is in overbought territory based on the weekly stochastic indicators. The 10-week RSI is high, but not yet in overbought territory. This could mean that the index is due for a little pullback over the coming months.
Conversely, the same chart for the S&P Bank Index shows that the index has just started to move higher over the last few weeks. The weekly stochastic indicators have recently moved out of oversold territory and the 10-week RSI is barely above 50.
The banking index peaked in December and the decline only accelerated during the meltdown in the overall market. It has a lot farther to go before it gets back up to its high, but it is trending in the right direction. The last few weeks seemed to show a rotation out of growth stocks and into value stocks and that could explain why the banking sector has performed so well in the last few weeks while the rally in the software sector has slowed down a little.
One of the reasons I chose these two sectors as my top performers for the year was based on the number of stocks from all 33 sectors that met my fundamental requirements. Those stats have changed dramatically. There are still 35 software stocks that meet my requirements, but there are only three bank stocks that meet my requirements now. In December there were 31 banks that met my requirements and 33 software stocks. The software stocks have increased slightly, but the number of bank stocks has dropped dramatically.
While I am happy with my call on the software sector, my call on bank stocks appears to be dreadfully wrong. It could have been worse and I could have been bullish on banks and energy stocks. Overall 25 of the 33 sectors had lost ground from the beginning of the year through June 3, so at least I had the top sector among my picks.
The point of this article wasn’t to congratulate myself, but rather to show you how very different things can be after a few months. What was an incredibly sound sector in December has become far from stellar. Sure I would love to see the banking sector turn around and gain ground by the end of the year to make me look good, but from my own analysis process, I won’t be making too many bullish bets on the sector.
I don’t make my investment decisions based on predictions I made five months ago and so I have adjusted and will continue to adjust going forward. The last three recommendations I’ve made to my newsletter subscribers have come from the telecom equipment sector, recreational products, and transportation services. The one before that was from the software sector and it’s already up over 25% since it was recommended at the beginning of May.
The overall market picture has changed dramatically since the beginning of the year and investors need to adjust their sights.