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Amid Market Volatility, Defense Has Been a Great Offense

25 July 2012 in Trading Ideas

The anything-but-sideways movement of stocks in 2012 has been quite impressive. The year started with the S&P 500 beginning an upswing that would result in a 13% jump in stocks in the year’s first quarter, only to see a drop of about 11% during the next two months.

The past few weeks have brought more of the same: In the past 10 weeks or so, the 1360 level on the S&P has been crossed six times, as of Monday.

This volatility, of course, comes amid a backdrop of investors attempting to value stocks – and other assets — in an uncertain global environment that has mostly seen predictions somewhere between a gradual slowdown (in the US, among other places) to the financial Armageddon expected by some in Europe.

The question is, what has been working for investors, amid a 30-day stretch that, at the end of the day, has seen the broader S&P 500 trade essentially flat?

The answer has been: the traditionally defensive stock sectors, which suggests that investors aren’t incredibly enthusiastic about taking on a huge amount of risk when it comes to equities.

Last weekend, StockCharts.com’s Charwatchers blog published a table of the sector SPDR exchange-traded funds and their performance relative to the S&P 500, as of the last 30 days ended last Friday. The winners: energy, consumer staples, healthcare and utilities.

The losers? Financials, tech and consumer discretionary stocks.  This makes some intuitive sense, given that the underperformance of big-cap tech stocks during the past month has played a big role in the broader market’s tepid performance.

It almost goes without saying that the performance of stocks in the past 30 days has almost no bearing on what investors can expect from here, especially in this sort of volatility, but as Chartwatchers blogger Arthur Hill suggested, “Such risk aversion is negative for the broader market and could foreshadow a summer peak in the S&P 500.”

That peak was 1379, set last Thursday.


Tags: volatility