Sector Investing

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I finally took a loss on my SMH position. The market has been rising but it had been doing it with only limited participation. I did not get the best possible price on Friday but I sold into that initial pop higher.

I do think the FED will pause at the next meeting. But I also think the damage from interest rates rising has yet to be fully priced into the market. So we could rally on that pause but if the market goes up enough I will short it.

Have you looked at the yield curve lately? Pretty darned close to fully inverted:

http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

http://stockcharts.com/charts/YieldCurve.html

The economy is slowing. The weaker than expected economic numbers on Friday were cause for added certainty that the FED must pause. Unfortunately they also point out that the FED has already gone too far.

Here is something else from the Big Picture:

http://bigpicture.typepad.com/comments/

The Sensitive Sectors

"The most volatile part of the American economy has slowed significantly in the last nine months, providing a warning of both recession and lower stock prices"

So writes Floyd Norris in today's NYT, A Slowdown in a Sensitive Sector May Bode Ill for Stocks, or Worse.

Norris calls these three elements "the sensitive sector" and noted they have, in the past, provided an early warning of recession and lower stock prices:

"Over time, a good indicator of both the economy and the stock market has been the relative performance of the [these sectors versus the broader] economy over nine-month periods. Most of the time, the sensitive sector does better. But when that sector turns in poorer performance after a sustained period of outperformance, it is a warning. And that is what has happened. Over the nine months through June, the sensitive sector grew at an annual rate of 2.1 percent, while the rest grew at a rate of 3.7 percent.

The graphic below accompanied his article: It is a depiction of growth in three sectors that can be considered amongst the most sensitive to economic changes and to interest rates: consumer purchases of durable goods, residential construction spending, and business investment in equipment.





Graphic courtesy of NYT

The first question any skeptic should ask is, how reliable a tell is this under-performance been in the past?

The indiciator is bvetter at foreshadowing a slowdown rather than an outright recession, where its record has been mixed: This is the ninth reversal since 1954. There was no early recession after reversals in 1955, 1964, 1978 or 1987. Recessions did follow after reversals in 1959, 1969, 1973 and 2000. In all eight of the cases, they did foreshadow a substantial slowing of the overall economy.

But the most significant tell applies to Stock prices:

"Moreover, anyone who got out of the stock market when a reversal happened seldom regretted it. There were some gains, but they were generally small. And selling at the time of the reversals would have gotten investors out before the major bear market of 1974-75, the 1987 stock market crash and the worst part of the stock market decline from 2000 to 2002. Over all, the average performance of the Standard & Poor’s 500-stock index in the 12 months after a reversal is a negative 5.7 percent."

That's a signal worth paying attention to . . .