DEFENSIVE STOCKS ARE 2006 LEADERS WHILE HOUSING IS YEAR'S WEAKEST GROUP -- PHARMACEUTICALS GET STRONGER WHILE TRANSPORTS SINK
2006 LEADERS... If you glance at "John's Latest Performance Chart" you'll see the best and worst group performances for the first eight months of 2006. It shows the six top performers for the year compared to the four worst. The six winners have something in common, which is that they're defensive in nature. In order of relative strength, the six leaders are REITS, energy, gold & silver, telecom, utilities, and consumer staples. Chart 1 plots three of the groups. The top line in Chart 1 is the North American Telecom Index (XTC) which has just hit a new 52-week high. The middle line is the Utility Sector SPDR (XLU) which has just done the same. The bottom line is the Consumer Staple SPDR (XLP) which has also reached a new high. In addition to being the types of stocks that do better in a weakening economy, many of the stocks in those groups pay dividends. That makes them doubly attractive to investors who aren't too optimistic about the direction of the stock market or the economy. That negative view is also reflected in the year's worst performers.
Chart 1
2006 LAGGARDS... The four worst 2006 performers are homebuilding, airlines, semiconductors, and retailers. Three of them are shown in Chart 2. The top line is the S&P 500 Retail Index (RLX) which has been falling all year. The middle line is the PHLX Housing Index (HGX) which has been the weakest of all. The bottom lines show a weak airline group which has been hit especially hard by rising oil prices. Airline weakness has spread to the entire transportation group over the last few months. Although not shown here, a weak Semiconductor (SOX) Index reflects a weak technology sector, which is also sensitive to trends in the business cycle. The yearlong drop in housing stocks correctly anticipated recent reports of a serious housing slowdown which threatens to drag the rest of the economy lower. Rising oil and weak housing are two of the reasons that retail stocks have been doing so poorly. All four groups are the types of stocks that would be expected to act poorly in a weakening economy.
Chart 2
TRANSPORTS FALL WHILE DRUGS RISE... Another sign of a generally defensive market can be seen in the next two mutual fund charts. Fidelity Select Transport was the weakest sector fund over the last week and one of the weakest over the last three months. The chart shows the economically-sensitive transportation group well below its 200-day moving average and trading at the lowest level of the year. That type of breakdown in a group sensitive to the direction of the business cycle (which appears to be peaking) is counter-balanced by strong action in pharmaceuticals which is a more defensive group. Chart 4 shows the Fidelity Select Pharmaceuticals Fund trading near its yearly high. Its relative strength line has been rising (especially since the start of July) while the RS for the transports has been falling. The underlying message is the same as in Charts 1 and 2. Investors are opting out of economically-sensitive groups and are opting for defensive sectors that do better in a slowing economy.
Chart 3
Chart 4
