PLAYING DEFENSE WITH THE SECTOR ROTATION MODEL -- THE NEW GOLD STANDARD -- FINANCIAL SPDR HITS NEW LOW AND LEADS MARKET LOWER -- S&P HITS THREE-MONTH LOW -- BONDS BOUNCE AS STOCKS WEAKEN -- GOLD AND SILVER SURGE -- WATCH MY BLOOMBERG INTERVIEW HERE

SECTOR ROTATION MODEL ... One of our readers asked for more information on the Sector Rotation Model shown below. [This version can be found under the AMEX SPDRs part of the Performance Charts]. The model shows which sectors tend to lead at various stages of the business cycle. In my new book, I changed the "Services" sector to "Healthcare" which makes it even clearer. On my Friday interview on Bloomberg (which you can view below), I explained that healthcare stocks usually do better during a bear market and recession. The Model shows why. Usually, the end of an economic expansion (and bull market) is characterized by rising energy prices. That puts Energy in a leadership role. Eventually, that starts to hurt the economy. When it does, defensive groups like Consumer staples, Healthcare, and Utilities take over the lead. That's been the case for the last year. As I also explained on Bloomberg, one of the ways we can tell that a market is bottoming is when money starts flowing into Financials, Consumer Cyclicals, and Technology. So far, that hasn't happened.

Chart 1

PLAYING DEFENSE ... Chart 2 shows why consumer staples and healthcare are considered defensive stocks. The two lines are essentially relative strength ratios of the Consumer Staples SPDR (red line) and the Healthcare SPDR (blue line) versus the S&P 500 (flat line) since 1998. Both defensive groups outperformed the market during the 2000-2002 bear market and then underperformed during the bull years from 2003 through 2007. They've done much better since mid-2007 when the market started peaking. One way we'll be able to tell when things are getting better is when the relative strength ratios of these two defensive groups start to weaken.

Chart 2

NEW GOLD STANDARD... Prior to the 1930s, all foreign currencies were measured against gold. While gold was fixed at a set price, currencies were fixed at a set gold price. That was the known as the "gold standard". While that system helped provide discipline among central bankers, it was very restrictive. As a result, the old gold standard was abandoned during the Great Depression of the early 1930s. Chart 3 shows that a new gold standard has existed since 2002. It measures the world's three top currencies (the dollar, the Euro, and the yen) relative to gold (which is the flat line). Chart 3 shows that all of those currencies have been falling relative to gold for the last six years. One of the reasons that gold has been rising while most commodities have fallen, is because gold is more traditionally viewed as an alternative, and maybe the ultimate, currency in times of stress. [It's also viewed as an alternative to stocks during bear markets]. Chart 4 plots the three same currencies relative to gold since September. The Euro is by far the weakest of the three. It's worth noting, however, that the dollar and the yen have also been falling against gold since November. Although the dollar has risen along with gold since December, gold is still the stronger of the two. If we were still using the old gold standard, the U.S. Dollar would be losing ground at the moment.

Chart 3

Chart 4

FINANCIALS LEAD STOCKS LOWER ... It's the same old story. Selling in the financial sector pulled stocks lower all over the globe. Financials lost -9% and were the day's biggest loser. Chart 5 shows the Financials Sector SPDR (XLF) falling to a new low on rising volume. Its relative strength line (below chart) is also falling faster than the S&P 500. It's doubtful that the market will get any relief until financials stop dropping. The Dow and the S&P 500 fell to the lowest levels since November. Chart 6 shows the S&P 500 losing -4.5% and closing below 800 for the first time since November. That November low appears to be where the market is heading. The two sectors that fell the least were consumer staples and healthcare both of which lost -1%. The only group that rose was precious metals on the back of strong gains in gold and silver. All other commodities fell along with stocks. The CRB Index lost -9% on the day. Bond prices rose with most of the gains in long-term Treasuries.

Chart 5

Chart 6

WATCH MY TV BLOOMBERG INTERVIEW ... Those of you who missed my Friday evening interview on Bloomberg can watch it here by clicking on (link). Thank you to the reader who sent it to me.