What’s Dragging Down the Market

The market is down for the third day in a row. Since July 3, the S&P 500 has lost close to 4%.
This is a continuation of the selloff that began in early May. The recent downturn, however, has a very different flavor than inital correction.
In the first part of the selloff (May 5 to June 13), the energy stocks were hit the hardest. Here’s a chart showing the Oil Services HOLDRs ETF (OIH) in gold, compared with the S&P 500 (in black) and the Morgan Stanely Consumer Index (^CMR) in blue.

This what I wrote on June 13, (Dissecting the Bear):

Since May 5, the S&P 500’s market value has fallen by $807 billion. That’s a nice chunk of change. Percentage-wise, it comes to -6.74%.
What’s interesting to note is that since the stock market peaked, long-term interest rates have actually declined. Gold is down by $100 an ounce. This is not a market worried about inflation. If we use some reasonable assumptions, in just five weeks, the market has become convinced that around $50 billion of next year’s corporate profits will not materialize.
The Big Bad Bear, however, hasn’t treated everyone equally. Here’s the performance of the 10 industry sectors since May 5:
Utilities………………..+0.78%
Staples………………..-1.61%
Telecom………………-2.00%
Health Care………….-2.28%
Financials…………….-5.60%
Discretionary……….-5.68%
Industrials……………-8.71%
Energy………………..-11.41%
Tech…………………..-12.12%
Materials…………….-13.30%
Two observations. First, it’s almost the mirror image of the market before May 5. The other is that it’s a pretty wide gap. The bottom three groups, combined, make up just 27% of the S&P 500’s value, but have contributed more than half the losses. The rest of the market has suffered nary a scratch.

The defensive sectors were pretty safe. But since July 3, the energy stocks have been doing well (i.e., not down a lot), while the rest of the market has been feeling the squeeze.
Here’s how the sector ETFs have performed from July 3 to this afternoon:
Utilities (XLU)………………..0.09%
Energy (XLE)………………..-0.03%
Health Care (XLV)…………-1.06%
Staples (XLP)……………….-1.52%
Financial (XLF)……………..-3.42%
Industrial (XLI)…………….-5.72%
Materials (XLB)…………….-5.88%
Discretionary (XLY)……….-6.16%
Tech (XLK)……………………-6.59%
Tech and Materials are still lousy. Utes, Health Care and Staples are holding up OK, but energy has changed sides, going from laggards to leaders.

Posted by Eddy Elfenbein on July 14th, 2006 at 1:12 pm

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.