Roger Nusbaum
Discretionary: Going underweight consumer discretionary in a slowdown of some magnitude is absolutely a Chapter One concept. As I mentioned in September the decision to delay buying a Harley(HOG Quote - Cramer on HOG - Stock Picks) or some other $20,000 toy is common, or at least the market perceives it as such. The Discretionary Sector SPDR(XLY Quote - Cramer on XLY - Stock Picks) is down 17.33% in the last four months.
This sector will provide leadership again but its time to shine is simply at a different point the cycle. When things are growing and healthy people feel much better spending $20,000 on a Harley. Staples: Just like with health care, people will not alter their smoking, drinking or ketchup habits in a bear market. The Staples Sector SPDR(XLP Quote - Cramer on XLP - Stock Picks) is up 2% in the last four months, but candidly I am surprised it hasn't done better than that. Still, this is an area to be overweight if you buy into a slowdown. Telecom: In September I talked about preferring the Ma Bell types of companies and specifically preferring foreign over domestic. I was very surprised by the action in this sector. The iShares DJ Telecom Index Fund(IYZ Quote - Cramer on IYZ - Stock Picks) has dropped 22% and it's not just because of the recent blow up at AT&T(T Quote - Cramer on T - Stock Picks). Foreign, as measured by WisdomTree International Communications Sector Fund(DGG Quote - Cramer on DGG - Stock Picks), is up 2% plus a 2.3% distribution in the last four months. This was really a head scratcher for me because the dividend
and usual low volatility should be a place for people to hide in a decline. My preferring foreign here should be attributed to plain luck. I continue to think foreign Telecom will be a good place to overweight as the decline works itself out.
Utilities: What I just said about yield and low volatility worked for utilities and I think will continue to work. The iShares DJ Utilities Index Fund(IDU Quote - Cramer on IDU - Stock Picks) is up 2%, which again makes sense if a bear market looms.
While the track record from the last article has worked out pretty well I want to stress how little analysis was employed. The conclusions from the September piece were all textbook, but being in touch with these dynamics can put the wind at your back vs. the market and allow for less pain in the face of a normal bear market.
The obvious question should be if this is a bear market why not get completely out? This boils down to investment philosophy. I am convinced a bear market has started but I could be wrong. To go 100% cash is to bet that you are right about a bear starting and it is a bet that you will know when to get back in. Some will be able to do this but I am not willing to bet I can be one of them. Are you?
| Weighting of the S&P 500 Note the shifts among various sectors. |
||||||
| Sector | S&P 500 Weight 9/10 | S&P 500 Weight 1/18 | ||||
| Financials | 19.81 | -16.96 | ||||
| Tech | 16.35 | -16.26 | ||||
| Healthcare | 11.73 | 13.02 | ||||
| Energy | 11.41 | 12.46 | ||||
| Industrials | 11.37 | 11.41 | ||||
| Discretionary | 9.51 | -8.48 | ||||
| Staples | 9.47 | 10.71 | ||||
| Telecom | 3.67 | -3.43 | ||||
| Utilities | 3.47 | 3.75 | ||||
| Materials | 3.08 | 3.31 | ||||
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