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Is the Sector Breakdown Indicating a Potential Market Fall?

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Various sectors of the S&P 500 index

Sectors of the S&P 500 index (SPY) have an important role in the economy (IVV). When economic activity improves and the market shows strong movement, major sectors such as the financial sector (XLF), technology sector (XLK), and industrial sector (XLI) perform well.

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Technology sector

In June 2017, we saw some selling pressure in the technology sector. Leading investment firm Goldman Sachs (GS) issued a report in June 2017 and warned about the higher valuation of major technology stocks such as Facebook (FB), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL). This made investors take profits from the technology sector. The Technology Select Sector SPDR ETF (XLK), which tracks the performance of the technology sector, fell nearly 3.2% in June 2017. However, it remained the best performing sector so far this year.

Banking sector

Now we’re experiencing some weakness in the banking sector. The SPDR S&P Bank ETF (KBE), which tracks the performance of major banking stocks in the United States, fell nearly 4.1% in the last five trading sessions. On a year-to-date basis, the banking sector fell nearly 5.2% as of August 21, 2017.

Utilities sector

The utilities sector is an important sector for the economy. The Utilities Select Sector SPDR ETF (XLU), which tracks the performance of the utilities sector, rose nearly 1.0% in the last five trading sessions, while the S&P 500 index fell nearly 1.5% during the same period. On a year-to-date basis, XLU rose nearly 12.9% as of August 21, 2017. Utility stocks are generally high dividend paying stocks. Since they’re high-yielding instruments, investors generally prefer this sector during a market turmoil.

However, the utilities sector is generally sensitive to interest rate movements. When interest rates rise, it affects the cost of capital of this sector. The sector is highly dependent on debt for its operations and infrastructure developments.

This sector’s breakdown could lead to a potential market fall in the near future. In the next part of this series, we’ll see what moving averages are signaling for the market.

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