A Healthier Set of Leaders

Submitted by Mark Hanna

Courtesy of MarketMontage. View original post here.

Happy Fed Day!

While everyone awaits “the pullback” that sometimes feels like it will never happen, one should point out that the rotation I pointed out a few weeks ago in [Jan 13, 2012: The Mutually Exclusive Rally] has created a more healthy group of leadership stocks.  While the market had rallied a few weeks into the end of 2011, the leadership was defensive – utilities, consumer non discretionary, slow growth dividend players, and stodgy healthcare. These stocks and groups have taken a break all through January.  For example, notice the total lack of appreciation by Pfizer since the turn of the year, after a big run in late 2011:

[click to enlarge any chart]

Or the utilities, which have actually lost ground in 2012 (not the only group to do it, I am just picking them as representative)

Hence trend following strategies and/or those that stick to relative strength were completely ill positioned for the 2012 rally.

As I noted in that piece a few weeks ago the nature of this rally has been strange in the fact that it’s as if a light switch was turned on Jan 1, 2012.  Certain groups were completely and utterly abandoned, while others have been embraced.  Normally a rally will broaden, and while there will be sector rotation, it will not be like this rally where some groups run COMPLETELY at the expense of others.  But for whatever reason, that is what we got this time around.

While we want to see more groups taken up together, we do have to say the leadership groups now are far more healthier than what was leading the market in late 2011.  These are the pro cyclical groups – semiconductors, financials, biotechnology, industrials.  See the charts below.

Hence, if this is leg 1 of a multi month rally this move into ‘pro growth’ areas is good news.  However at this moment since the rally has been so exclusive to these sectors, they are extremely extended – even as the market overall has not ‘spiked’ up but simply grinded up.  The reason for that of course is the rotation … the indexes grind higher as money has moved 180 degrees from groups XYZ to groups ABC.

It still strikes as very strange how narrow the rally has been in 2012 in terms of absolute versus relative outperformance of these new groups.  They are not doing a good job of ‘sharing’ the spotlight – just as the defensive groups were not ‘sharing’ in latter 2011.  A strange development.   When this pullback does occur (2014ish????) it will be interesting to see how the bounce plays out, and if we get a more broad involvement across many sectors rather than a relative few.

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog