Last week I noticed a change in the Top Fund Groups table on the Home Page -Â Healthcare, Consumer Discretionary, and Consumer Staples groups were all among the top 5 shown.Â These industries are not normal leaders during a healthy market,Â in fact Healthcare and Consumer Staples are among the defensive industries.Â The obvious missing sector is Utilities, and as I write this it is in the number 6 slot and making a dash for the top five.Â This new look to the Top Five raised the question – How has the market performed when these industries lead?
Since this is an ETF site I wanted to look at it from that perspective, but ETF history is short.Â For this reason I decided to pick a Select Sector SPDR for each industry and compare relative RSf to future performance of the market (SPY).Â The three SPDR funds chosen were Consumer Discretionary(XLY), Consumer Staples(XLP), and Healthcare(XLV).Â The test period covered the 10 year span from the beginning of 2001 through end of 2010.Â This includes two bear markets, two recoveries, and the intermediate period.
The first test run was between Consumer Staples and Consumer Discretionary.Â This didn’t produce any results to get excited about, but things got more interesting when the RSf of these three sectors were compared to the RSf of SPY.Â As you can see in the chart to the right, the market performs significantly worse when either Consumer Staples, or Healthcare, has a higher RSf than does SPY.Â Consumer Discretionary shows the same effect, though not as pronounced.Â Â Consumer Staples lead SPY about 49% of the time, and Healthcare lead SPY about 44%, so either of these would be market bullishÂ something over 50% of the time.
If you are like me and wouldn’t want to rely on a single sector for your signal, you might look at combining the Consumer Staples and Healthcare signals.Â Let’s say we are bullish when either of these ETFs has an RSf below that of SPY and bearish when both have higher RSf rankings.Â Such a scenario has shown an annualized return when bullish of 10.2% for 68% of the time and a return of -14.6% for the 32% of the time when bearish.Â Since a picture is worth a thousand words, they say, here is what such a scenario would have looked like.
Am I proposing this as a market timing strategy?Â Not in it’s current form.Â There are several issues lurking just beneath the surface.Â For one, there are often near daily changes during the transitions from a bullish period to a bearish period, and back.Â Â I plan to spend more time on this and hopefully find a way to define cleaner transition points.
So why publish it?Â There appears to be significant value in knowing these relationships, and since the three relevant RSf values are published daily on this site, the effort to track this indicator is fairly minimal.Â Also there is timeliness, the Healthcare indicator went bearish on April 19, followed by the Consumer Staples indicator on May 2.Â Â It might be an interesting time to watch what happens.
Here is a link to the Portfolio of the three relevant symbols.