Thursday, January 20, 2011

Sector Strength Suggests January Correction May Have Arrived

Michael Albert submits:

On December 27th of last year I published an article titled “Prepare for a January Correction” in which I argued that the performance of lower beta sectors which tend to do well in declines were potentially bottoming relative to the S&P 500. Given the aggressive weakness that's occurred over the past few days, particularly in beta sensitive small-cap stocks (IWM), I thought it might be worth revisiting the price ratios of those sectors to get a sense of if the correction has begun.

To review, the sectors that tend to perform best in a decline are Consumer Staples (XLP), Healthcare (XLV), and Utilities (XLU). These sectors generally include stocks with lower beta sensitivity to market movement. Money managers who are required to be long stocks at all times favor overweighting these sectors in their portfolios if they believe a period of volatility is coming, since for the most part these very same managers are not given the chance to hold cash.

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