Sector Strength Suggests January Correction May Have Arrived

Michael Albert submits: In recent months a number of analysts have argued that the term “risk-off” would soon be extinct as correlations among asset classes have declined since the height of the financial crisis. But in observing market action over the past few days, I get the feeling that correlations may soon rise again should we be in the early stages of a period of high volatility. Commodity prices are falling alongside equities, while bonds are rallying. We've seen this movie before.

Michael Albert submits: Now that the Holidays are (sadly) behind us, I'm struck by how much complacency appears to have set in. It seems to be a forgone conclusion that markets will continue to run higher. Looking at sentiment indicators such as the Put/Call ratio and investor bullishness surveys does indicate that in the near-term, investors have almost all piled into the same trade (higher higher). This is a concern from a contrarian standpoint to be sure.

Michael Albert submits: It’s a bull market! Everything is going up because of the Bernanke Put! Take risk!

Michael Albert submits: There appears to be quite a bit of angst among investors in recent weeks, prompted mostly by the heavy sell off in some high flying commodities. I noted on April 26 in an article I published here on SeekingAlpha that silver, in particular, was very close to a mean reversion moment – a mere two days before the decline. This was not based on a hunch, but rather an analysis of silver's price rise in the prior rolling month relative to all other areas of the investable landscape.

Michael Albert submits: I noted in an article earlier this week I titled "The Correction Transition Begins" that despite what appeared to be an otherwise strong day for markets on the final trading day of February, sector strength was firmly led by defensive groups.

By Richard Shaw (QVM Group): This table shows the best and worst three-month, one-year and three-year total return, the trailing yield, and the standard deviation, mean return and Sharpe Ratio for three years, five years and 10 years for ETFs that are proxies for the S&P 500 and nine sectors.

Richard Shaw (QVM Group) submits: Based on current and recent price behavior, these U.S. sector ETFs are the better trend following choices among the 10 U.S. sectors (as of 2011-05-11):