Saturday, October 13, 2007

Trend Following by Market Theme

In this chart, we decompose the S&P 500 Index (SPY) into eight of its sector components for the last week of trading. For easy comparison of performance, I have set each sector to an equivalent price at the start of the week.

Although SPY was up on the week, we see that not all sectors participated in the strength. Specifically, we see relative weakness in XLF (Financials), XLI (Industrials), XLY (Consumer Discretionaries), and XLV (Health Care). Indeed, those four sectors were down on the week.

Meanwhile, note that much of the SPY strength came from XLE (Energy), which was up about 3% on the week. Also up on the week were XLB (Materials), XLP (Consumer Staples), and XLK (Technology).

Note, interestingly, that by Tuesday the sectors had already separated themselves out by performance. The top sectors for the week were already outperforming; the worst performing sectors were already at the bottom of the heap.

You don't have to be in a trend to be a trend follower. When you notice the sectors and themes driving the market averages, you're in a good position to follow the flows of capital. Weak dollar themes and concerns over economic slowdown continue to define trends *within* the market averages.


Relational Thinking and Trading Success