New York (HedgeCo.net) Last week saw the 13-week moving average for the Materials Select Sector SPDR (NYSE: XLB) crossed bearishly below its 52-week moving average. The 13-week moving average is unconventional, but it represents one quarter’s worth of data and of course the 52-week moving average represents the past year.
When the moving averages made the crossover on the XLB, it made the third sector SPDR to experience such a cross. The Energy Select Sector SPDR (NYSE: XLE) did it in November and remains there today while the Utilities Sector SPDR (NYSE: XLU) did it in June.
The Industrial Select Sector SPDR (NYSE: XLI) looks as though it will see the same bearish crossover in the next week or two. If the XLI does see the moving averages cross, it will make four of the nine Select Sector SPDR ETFs that will have the 13-week moving average below the 52-week. The last time there were four or more with this situation was in January 2008.
There was also another possible sign of a selloff in the future from a story featured on MarketWatch.com. The article looked at the Guggenheim S&P 500 Equal Weight ETF (NYSE: RSP) versus the SPDR S&P 500 (NYSE: SPY) and their relative performances. The RSP as the name suggests invests equally among the 500 stocks without regard for the capitalization of the stock. The SPY is a weighted ETF just like the index with the largest stocks in cap size getting a higher weighting in the portfolio.
What the article pointed out was how the RSP has lagged the SPY over the last three months. Through the end of last week, the RSP lost 1.62% over the last three months, whereas the SPY gained 0.04%. There was a similar crossover in relative performance late last summer, right before the correction in the fall.
Looking back over the course of the last eleven years when the RSP was introduced, there was a similar performance crossover in the summer of 2007 before the market entered the last bearish phase.
This crossover in relative performance could be a sign that investors are shifting to a more conservative investment approach. If you think about it, when the market is climbing like it has for the last six years, most stocks move higher and smaller stocks tend to outperform, just look at the Russell 2000 versus the S&P during bullish phases. When the performance shifts and investors are moving in to larger cap stocks, it is a signal that they are concerned about the market.
Between the moving average crossovers and the performance of the RSP versus the SPY, these are two long-term signals that could be giving investors a signal of a correction or even the next bearish phase in the market. As we have pointed out on numerous occasions, hedge fund strategies tend to outperform during choppy markets, corrections and especially in bearish phases.
Rick Pendergraft
Research Analyst
HedgeCoVest
