Thursday, July 24, 2008

Tracking Sentiment in the Movements of Sectors and Asset Classes

I recently noted the stock sector rotation that had dramatically shifted patterns of performance in the market. Tracking these themes has been key to trading the market so far this week.

Above we see percent changes in the S&P 500 Index (SPY); the financial sector within the S&P 500 universe (XLF); the homebuilders index ($HGX); the consumer discretionary stocks within the S&P 500 (XLY); oil (USO); gold (GLD); yields on the ten-year Treasury note ($TNX); and energy stocks within the S&P 500 Index (XLE).

Note the continued weakness in energy stocks as a function of commodity weakness (oil, gold), and the continued strength in the financial stocks, housing, and consumer discretionary issues. As financial shares and stocks overall (SPY) have strengthened, we've seen a bounce in the U.S. dollar and a rise in Treasury rates--a clear reversal from the flight to quality that had driven yields below 3.8% early last week.

By tracking the thematic movements of sectors and asset classes, we can gain a perspective on whether markets are avoiding risk or displaying risk tolerance. Those sentiment shifts have defined both down moves and up moves so far in 2008.