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SECTOR WATCH: First Half Winners and Losers
By Frederic Ruffy, Optionetics.com
6/29/2005 2:30 PM EST

http://optionetics.com/articles/article_full.asp?idNo=12734

Stocks put in a mixed performance during the first half of 2005. With only two trading sessions left in the second quarter, energy stocks have been the market’s top performers. Airline and tech stocks have been the weakest. In addition, an interesting pattern developed throughout the US stock market, as levels of market volatility continued to fall to new lows.

Energy was a major theme in the financial markets during the first six months of the year. As crude oil prices continued to set a series of new all-time highs, including a rise to a record of $60.00 a barrel last week, investors bought shares of energy related companies. The list includes major oil, oil drilling, as well as natural gas companies.

The table below summarizes the performance of various sector indices during the first half and the second quarter of 2005. With two days left until the end of the month of June, the AMEX Oil Index ($XOI), which tracks the performance of a basket of major oil companies, is up nearly 50% on the year. The XOI rose 5.5% during the second quarter. It is this year’s top performer by far. Oil drilling and natural gas stocks are also doing well. While the AMEX Natural Gas Index ($XNG) is up 20.5%, the PHLX Oil Service Index ($OSX) is up nearly 18%.

Utility stocks have also performed well in 2005. During the first six months of the year, the Dow Jones Utility Average ($UTIL) is up 15.2%. The index is an average of fifteen utility stocks, which have a dividend yield of slightly more than 3%. Utilities might be benefiting from the low interest rate environment, as investors seeking income buy shares in the sector. The utility average was strong during both the first and the second quarter.

Other areas of strength in the first half of the year include defense, brokerage, and healthcare stocks. Biotechnology stocks have been the best gainers during the second quarter. The AMEX Biotechnology Index ($BTK) is up more than 14% since March 31.

Airlines stocks have been the biggest losers during the first six months of this year. The AMEX Airline Index ($XAL) has been weighed down by rising jet fuel costs and concern about potential bankruptcies in the industry. Networking, computer, software, gold mining, cyclicals, and financials have also been weak.

Another interesting aspect of the market action during the first half of 2005 has been the drop in volatility. For example, as we can see from the last column in the table, the 20-day statistical volatility of the S&P 500 Index is only 8%, which is an extremely low number. Even Internet stocks, measured by the Street.com Internet Index ($DOT), have seen significant declines in volatility this year. The 20-day SV of the Internet index is only 12%. A few years ago it was near 100%!

However, a lot has changed during the past few years. In addition, faced with the possibility that volatility will remain low during the second half of 2005, directional traders might want to compartmentalize the market and focus on those areas that are trending in one direction or the other. The list includes energy, biotechnology, transportation, gold mining, brokerage, and utility stocks. Stocks in these sectors can still produce large percentage moves in the second half of this year, even if the S&P 500 Index trade mostly sideways like it did in the first half of 2005.


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site