Hi Guys,
Today, CXO Advisory Group published a short statistical study that explored using sector ETFs as candidate market returns signals.
The study demonstrated that the sectors tend more to move synchronously with the general market price movements than as precursor signals. That’s not really a shocking conclusion given that the 9 basic sectors, with a few exceptions, are such large parts of the market composite.
The correlation coefficients that were a byproduct of the analysis might be of some use to those investors seeking a small amount of extra diversification. The industrial sector (XLI) had the tightest correlation (0.89), whereas the utilities sector (XLU) showed the loosest correlation (0.48). Again, no surprises here since utilities often behave more like bonds than like stocks.
Here is the Link to the study:
http://www.cxoadvisory.com/4416/economic-indicators/do-any-sector-etfs-reliably-lead-or-lag-the-market/#more-4416CXO concluded as follows: “In summary, there is little evidence that any equity sector ETFs reliably lead or lag the overall U.S. stock market over the past 13 years. Utilities may slightly lag the broad market.”
CXO does good work. Enjoy the article and profit from it.
Best Regards.
Comments
The current possible flaw; and one which will likely remain in place, is that many hedge funds and big investment houses now use many etf's as part of the machinations and/or flipping areas for investments.
If the etf sectors base was more of a "mom and pop" area of investment sentiment, I would feel more comfortable with indications of directions.
However, I must conclude that this area, too; has become a playground of the power monies.
This does fully exclude the value of watching etf movements; as "mom and pop" are not the market movers, so whatever the big kids are playing with does have some value judgments attached.
Regards,
Catch