Approximately one month ago, I tallied the sentiment indicators for the 100 stocks that make up the 10 largest holdings in the 1o sector SPDRs. The idea was to figure out which sectors were the most susceptible to fall based on how loved they were. The results weren’t astonishing, but they did show some promise. The two most loved sectors were Consumer Discretionary and Energy. Those two sectors lost 4.0% and 9.73% in the last month while the S&P lost 4.53%. The two most hated sectors were Telecom and Utilities and these two saw returns of -6.65% and 3.27%. Had you shorted the XLY and XLE and bought the XLU and XTL, you would have fared much better than the overall market.
Based on these results, I was anxious to run the sentiment numbers for this month as well. I waited until yesterday to update the numbers as October options expired on Friday and this event tends to have the biggest impact on the put/call ratios. It is also worth noting that we usually get updates on the short interest numbers around the middle of the month.
Rather than just calculate the new sentiment composite numbers for each sector ETF, I decided it would be in our best interest to look at how the selloff impacted the sentiment for each sector and compare it to last month. The results were not what I thought they would be. Because the market sold off, I expected the defensive sectors such as Telecom and Utilities to see a little more love and for the growth sectors to lose some of their luster. In actuality, the sentiment composite numbers for the XLU and XTL rose more than the other sectors, which is indicative of growing pessimism. The only two sectors that saw lower sentiment composite readings were Energy and Consumer Staples.
The fact that the Energy sector saw its sentiment composite fall is particularly surprising as the sector has been under pressure more than any other sector as oil prices have fallen sharply.
What this table is telling me is that investors are not as concerned about the selloff as I thought they would be. It seems to be another case of investors buying the dip which is what they have been conditioned to do over the last six years. Buying dips can be a good thing when we are in an extended bull market. However, one of these times it won’t be just a small correction. Eventually one of the dips will be the start of a bear market. If investors are buying and holding, they can get hurt very badly by buying each and every dip.
My suggestion is to be a little more cautious right now. The economic reports from around the world are starting to show that a slowdown might be coming. The rally over the last few days was due as too many stocks were oversold on their daily charts. I am more interested in seeing what happens when these stocks reach overbought levels again and at the rate the market is recovering, that isn’t going to take long.
