With just four short trading weeks left in the year I thought we’d take a look at how the S&P 500 sectors are faring and what they may look like going into year-end.

Out of the nine sectors in the S&P 500 that I am tracking using the SPDR Sector ETFs, seven of them are higher by roughly 10%-20% year to date.  The two under-performing sectors year to date remain energy and utilities, as they have been on and off during much of 2012.  The leaders to the upside year to date are the financial and the consumer discretionary sectors, both of which are up more than 21%.

Here is the full leader-board of S&P 500 sector performance year to date:

Given the risk-on, risk-off toggles on the part of investors in recent years, courtesy of central planners (central banks) worldwide, it should not be entirely surprising to see a fairly high performance correlation among the sectors within the S&P 500.

This is clearly depicted on the multi-sector chart below; most sectors have moved from the lower right to the upper left on the chart in 2012, following the green arrow.  The notable slacker among the group, utilities, has deviated from the pack.  Even though the sector has seen a good rebound over the past two weeks, it remains an underperformer.  There are a multitude of reasons for this, ranging from concerns on tax hikes (fiscal cliff)on dividend paying utility stocks to the classic case that defensive sectors such as utilities tend to lag in an up-trending broader market.

Given the high correlation among S&P 500 sectors, which may be the go-to sector for a trade into year-end?  From a mean-reversion point of view one would have to give the utilities a fair chance.  Currently however there are in my opinion a few too many moving pieces regarding that sector.  This leads me to favor the cyclical sectors, which in case we see further green on our screen through the holidays would have to perform significantly.  In specific, from a technical point of view the industrial sector looks poised for further upside into year-end.

Despite having formed a somewhat concerning daily candle on December 3rd (1st trading day of December), the industrial sector etf (XLI) remains trading near its highs for the year and thus showing relative strength.  Furthermore, the longer-standing triangle formation on the chart shows a series of higher lows.  A break above the resistance line near $38 would be declared a significant breakout.

The transportation stocks, depicted via the iShares Dow Jones Transportation etf (IYT) are  part of the industrial sector.  Their chart is showing a similar pattern to that of the industrial sector chart above, where a solid break above $92 would also be a significant breakout.

In summary, should the broader market see further gains in the remaining weeks of 2012, the continued high correlation among sectors leads me to favor the industrial sector, given its relative strength but not yet entirely overbought levels.

Look out for a piece from me tomorrow, discussing one industrial stock to own and one to avoid into year-end.

 

 

 

 

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