Trying to make sense of this market is really a waste of your time. Traders seem bipolar at times and trying to predict if the market will be down 300 points or up 300 points is just as good as calling heads or tails on a coin toss.
Certainly day-traders are having a ball with this type of market volatility; however, for swing traders, market timing can be hard to nail down.
Ultimately, this volatility won’t last forever. Instead it is just a means to determining a new long-term trend. Eventually we will have some clarity, but knowing how each sector reacts to various market conditions can help us make better decisions.
Let me explain…
When it comes to market timing I like to use the S&P 500 as a barometer of what’s going on. When this index, or really any index, is in an uptrend, then it is safe to assume a good number of stocks are up as well.
Furthermore, some sectors just perform better in different conditions. One sector might be a better play in a down market, while another sector could be a better play in an up market. Similarly, some sectors may lag the performance of the S&P and others might do well in a volatile market.
A great way to determine how each sector reacts is to simply compare the sectors with the performance for the S&P 500. In the charts below, I have plastered the performance of the S&P 500 against various sectors to compare the individual relationships over the last 3 years.
The S&P performance represented by solid black line.
Airlines vs S&P 500 – Has never been the safest sector and generally tends to underperform.
Banks vs S&P 500 – Tends to move in sync with index, but has underperformed index on uptrend, which could mean drop is not as heavy.
BioTech vs S&P 500 – Has drastically outperformed the S&P 500; however, momentum and the trend has broken with the turn in the S&P 500. This could mean a heavier crash for this sector.
Gold & Silver vs S&P 500 – Could be a safe bet. Continues to head higher as S&P turns lower.
Natural Gas vs S&P 500 – Has moved tick by tick with the S&P 500, since the converging trends 2 years ago.
Oil Services vs S&P 500 – Has recently underperformed market and not drop as heavy.
Retail vs S&P 500 – Has outperformed market and can be hit hard with a down market.
Semiconductors vs S&P 500 – Has moved in sync with index.
Utilities vs S&P 500 – Underperformed S&P 500, so drop may not be as heavy.
While the comparisons show you the effectiveness of market timing, there is also another intersting point to take away from these charts: Regardless of how far apart the S&P 500 is from the sectors, at some point both the sector and index converge.
In other words, a market that was drastically outperforming will eventually come back to the S&P 500 and vice versa.
For more technical skills and chart pattern talk, check out Chart Pattern Manifest.