Today we’ve got the final (third) confirmation of bear market – DJ closed below intraday low made back in August. No signs of an intermediate bottom so far, which I expect 2-4 weeks from now.

We are at the point when many sectors already slided into bear, so I want to slice and dice a bit. The list will be sorted in chronological order. I take P/E from here, it doesn’t exactly matches the index I’m using for chart.

Sector Topped % from top P/E
Homebuilders $HGX July 05 58 4.5
REITs ICF Feb 07 40 34
Financials XLF June 07 30 79 for banks, 50 for services
Transports IYT July 07 23 15
Telecoms IYZ July 07 23 24
Consumer discretionary XLY July 07 25 5 to 15, no single number
Semiconductors $SOX July 07 36 10
Industrials XLI Oct 07 12 mostly low teens

As you can see the bear market is underway for a while already and some industries quite possibly already did the bulk of the decline. Try to tell this to permabull Kudlow.

What about other sectors?

  • Basic materials are in triangle and must break down soon (could be a good short)
  • Energy has no sign of topping so far, so we must assume that the trend is still up, but I suspect that upside is limited
  • Most of the various technology sectors are in the bear already
  • Biotechs are not cyclical at all, I see them flat for the last 2 years, could be a way to park money when you have no better ideas
  • Pharmaceuticals look slightly better then biotechs
  • Consumer staples are still in uptrend, could be used to hedge when you have too many shorts
  • Utilities are the only sector that is not trading according to textbooks. Classic sector rotation theory says that utilities must be early decliners together with financials, but this time they are not. Utilities hate inflation and in this cycle we had relatively low inflation and Feds already started to cut. That could be something related to our Kondratieff Winter phase. At any rate, I would not be long utilities now, just in case they start trading by the books

Any corrections are welcome and good luck with our investments!

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