Remember how it drove you crazy when one of your parents said "Do as I say, not as I do"? Yeah, well, prepare for another dose of the maddening instruction. Only this time, it's coming from the market. How so? Contrary to the highly-vocalized expectations that we've already entered a new bear market, judging from this week's behavior of sector-based ETFs like the iShares Dow Jones US Basic Materials ETF (NYSE:IYM), iShares Dow Jones US Industrial ETF (NYSE:IYJ), iShares Dow Jones US Utilities ETF (NYSE:IDU), and the iShares Dow Jones US Telecom ETF (NYSE:IYZ), investors are trading like we're still in a bull market.
Since the late-March peak, there's been a clear divergence between the performance of presumed 'safe' sectors like telecom, utilities, consumer staples, and healthcare compared to the results from more aggressive and riskier arenas like technology, materials, and industrials. Since that time, the iShares Dow Jones US Technology ETF (NYSE:IYW) has lost 10.5% of its value... the worst among all the major sectors. The Dow Jones US Basic Materials ETF is also hugging the bottom, with a 9.3% decline in just a tad under two months.
On the flipside, it's a misconception that this big pullback affected all sectors. The telecom sector has actually gained 5.6%, while the iShares Dow Jones US Utilities ETF advanced 1.2%.
How can one group do so poorly while another does pretty well? It's got little to do with earnings, as the prior earnings seasons results didn't quite jive with the way the sectors responded, and there's no way to know yet how Q2 earnings are going to unfold. Rather, the disparity is a reflection of how traders were thinking - they needed to feel safe, so they migrated out of volatile, risky areas like basic materials and industrials, and migrated into reliable sectors like healthcare and utilities.
Note that we've seen no new evidence of a recession in the meantime (a reprise of old evidence, but nothing new), and as was said already, earnings didn't and don't match the way these groups moved. Technology was actually strong on the earnings front last quarter, while telecom and utilities did rather poorly.
All that being said, the relative performance of these groups got real interesting this week.... in a good way.
Through the first four days of this week, the iShares Dow Jones US Basic Materials ETF has led the way with its 4.2% rally. The iShares Dow Jones US Industrial ETF is the runner-up, with a 3.1% advance. The consumer discretionary sector is right behind the industrials, with a 3.0% gain. These industrials, which had been the biggest losers since the beginning of April, were last week's biggest winners.
Care to guess how the biggest two-month winners have fared in just the past four trading days? The iShares Dow Jones US Telecom ETF is at the bottom of the barrel with a mere 0.4% gain. The iShares Dow Jones US Utilities ETF has only advanced 0.8% this week so far. The iShares Dow Jones US Healthcare ETF (NYSE:IYH) is third from the bottom run with its 1.4% gain.
What's going on? It's the opposite from a 'flight to safety'.... it's a 'flight back to risk', indicating that investors are feeling better about the future - especially in the face of more woes from Europe - then they're letting on.
To be fair, one week doesn't make or break a trend. But, all big trends start out as small ones. This is a trend definitely worth noting, and if we see more follow-through next week, the bears are gonna' have a lot of explainin' to do.