Rotation this year has been extreme – it has seemed like groups have alternated between doing great or very poorly.
The net has groups that have out-performed and under-performed (duh) the last 12 months.
But we’ve all looked at 12-month performances and wondered: “How can I notice this in month #1 or 2?”
That’s the purpose of this write-up – to look at what led and lagged over the last year and then reverse engineer both groups to see what clues they offered 10 or 11 months ago that would have pointed us in the right direction.
The image below, curtesy of Schwab, shows the performance of each group each month the last 12 months. The last column is the total gain/loss over the time period. At a quick glance, nothing jumps out – it looks like grandma’s quilt with no obvious patterns.
Let’s study the movement/ranking/performance of each group.
IT has been all over the place – sometimes leading (four finishes in the top 4) but also sometimes lagging (four finishes in the bottom 4). There were some big jumps from top to bottom and bottom to top and a few times where the trend continued in the same direction. Very messy. Trade ’em long when they’re hot, but dump them quickly when they cool off. Over the year, the group finished 5th.
Consumer Discretionary was very good for three months and then very average for seven. Strength in month #11 was followed by weakness in month #12. The group was mostly consistent and lacking volatility relative to other groups, and it finished in the middle of the pack.
Industrials were never the best, but they were consistently #3 or #4 (give or take one) eight of the 12 months. So there was a weak month or two mixed in with steady performance. Final ranking was #3.
Materials have had a good year. Only one month fell in the bottom four and eight months finished in the top half. And the group was trendy. It trended up (meaning it got progressively stronger relative to other groups) Jun-Sep (minus Aug) and then trended down until Jan and then trended up until May (minus one month). Right finished in the top 5 led to a final ranking of #2.
Real Estate was consistently average or below average. Only twice did the group finish in the top four, but it closed in the bottom four 5 times. Nothing exciting. No big out-performances, but there were four months in the bottom 3. Final ranking was #8.
Financials What’s the recipe for being the #1 ranked group? Only one month in the bottom three, six months in the middle; and five months in the top four. So the group doesn’t have to be a big out-performer all year to be ranked #1. There was an uptrend during the first half of the 12-month period and some volatility the second half. (Financials have taken hits this month, so the group would likely lose its #1 ranking if recalculated after tomorrow’s close).
Consumer Services have been all over the map. There are three prints in the top 3 and two in the bottom 3…and seven in the middle. There are some trends and some fluctuating performances. Kind of a mess, but nine finishes in middle or top half were good for a #4 ranking.
Consumer Staples have been consistent under-performers. Only once did it finish in the top 3 and six times it finished in the bottom 4. Final ranking #10.
Energy: Feast or famine. Four times it was #1 or #2 and six times it was in the bottom two. And the switch from good to bad or bad to good was sudden. When energy is strong, it’s strong. When it’s weak, don’t fight it. Final ranking was in the middle, which you’d assume is a bad place to be, but this is not indicative of the great opportunities present when the group led Nov-Feb.
Health Care was mostly weak. Eight finishes in the bottom half secured its overall performance at #9. Only twice did it finish in the top four.
Utilities: Wow! Four times utilities closed in the top two, but the group was still dead last, thanks to six finishes in bottom two. When it’s strong it’s strong; when it’s weak it’s weak. Unfortunately, from a trading standpoint, the longest it stayed in one place was two months.
The groups that did the best had very few months where they ranked near the bottom and had many months where they ranked in the middle or top half. They didn’t have to have numerous months where they were #1 or #2, but they were consistently pretty good.
The groups at the bottom were consistent underperformers. Yes, they occasionally did well, but overall, they were weak relative to the others.
So if a group severely underperforms, it may be best to give it time before considering it. Groups that did well over the 12-month period did well 60-70% of the time, so there’s time to play them if you missed the initial strength.