There had been three sectors that significantly
outperformed the S&P since the June lows: Technology,
financials, and energy.
One has already bitten the dust. Technology (NYSEARCA:XLK)
broke down and is now leading the market lower, down 10% from its
September highs on the back of "
Fading Apple-Mania
" compared to financials down only 2% and energy 7%. We
continue to watch the financial and energy sectors closely for
their potential relative strength breakdowns which would add weight
that a longer term market top is occurring.
More than Meets the Eye: Financial Stocks
On 7/21in our August newsletter we alerted our subscribers how
the energy and financial sectors led the market higher and lower
over the past two months and how they would also lead to the
downside. "Their underperformance and breakdown in early May
helped identify the market's change in trend from up to down and we
are expecting a similar event at the market's next juncture. Until
these sectors break down, the market's top likely is not in
place". Financial and Energy stocks were up 12% and 9% into
the market's peak in September.
Similar to Apple-Mania, an
article
from 11/6 "More than Meets the Eye: Financials" focused on the
impact that just 3 companies have on the financial sector that
contains over 80 companies. Due to their market caps, those
three companies make up over 25% of the XLF (NYSEARCA:XLF) index
and following them (as opposed to all 82) will likely give you all
the insight needed as to the financial sector's direction.
More than Meets the Eye: Energy Stocks
As of the September quarter end, the Energy Select Sector SPDR
(NYSEARCA:XLE) makes up over 11% of the S&P 500 by market
weight, fluctuating between the 4
th
and 5
th
largest. A summary of those sector weightings is best
captured in the chart from Standard & Poor's (NYSEARCA:SPY)
below.
Energy Sector Weightings
The S&P 500's energy sector as of 11/12/12 is made up of 45
energy companies and weighted based on market capitalization (stock
price x shares outstanding). But, if just the top 10 energy
companies out of the entire 45 are isolated, a full 62% of the
XLE's market cap is generated.
Furthermore, five stocks constitute 49% and just two
stocks make up over 35% of the XLE's value. It is actually more
concentrated than the often talked about Tech sector!
The spreadsheet captures the breakdown of the energy sector by
market cap weighting including the top 10, 5, and two
companies in the index.
The Key to the Energy Sector
The chart below shows the top five index constituents along
with XLE and shows very similar performance in the largest energy
companies.
Since the June lows, four of the top five companies in
the sector, making up 45% of its weighting, are clustered around
similar performance. ExxonMobil (NYSEARCA:XOM), a full 20% of
the index, is up 14% compared to the XLE at 13%, and the lone
outperformer of the 5. Chevron Corp (
CVX
) in red, Shlumberger Ltd (
SLB
) in orange, and Conocophillips (
COP
) in blue have all slightly underperformed the index since the June
lows.
Occidental Pete Corp (
OXY
) is the lone laggard down over 1% since the June lows and
underperforming the index by 14%. But, at only 4% of the
sector weight, its underperformance is dwarfed almost to
irrelevance by the larger constituents.
It's all About Exxon and Chevron
At 35% of the index, Exxon and Chevron are far more important
than Schlumberger, Occidental, or Conocophillips combined. In
fact, either one of those two large companies is more
important than those next three combined. Any
significant underperformance of Exxon or Chevron would no doubt
lead the XLE down in price.
By focusing on just two companies we can get a better
understanding of the entire energy sector!
Since the October S&P highs, the energy and financial
sectors are holding up their relative strength
outperformance. The energy sector has recently stopped
leading the market higher, now performing equally to the S&P
500. Once it and the financials start to become laggards, we
will be more inclined to call the recent market selloff worse than
just another dip buying opportunity.
The
ETF
Profit Strategy Newsletter
evaluates the bullish and bearish potential of the market with a
unique approach, along with corresponding target levels and profit
strategies. Relative Strength sector analysis is one strategy
we use to help us identify key trend changes in the sectors as well
as the broader markets.
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