Out With Risk; In With Safe

By James Brumley | May 27, 2011 AAA

You'd be hard-pressed to call it a "flight to safety", which is the usual description used to explain how aggressive investors suddenly become nervous and replace their risky growth stocks with safer, value-oriented names. In the current case, the term "meandering to safety" may be a better assessment. Nevertheless, there is a pretty clear transition into more stable sectors right now, and investors would be well-advised to take that lead. Why's that? Whether rational or not, if investors believe it's going to happen, they may end up creating a self-fulfilling prophecy. (For more information, read How To Be A Conservative Investor.)

TUTORIAL: Exchange-Traded Funds

Just the Facts
Using the major sector ETFs as a proxy, the last seven weeks have really shaken up the market's leaders and laggards.

Prior to the end of March, energy and basic materials stocks were the undisputed 52-week leaders. The Energy Select Sector DPDR Fund (NYSE:XLE) was blazing a trail with a 52-week gain of 36.4%, and the iShares Trust Dow Jones US Basic Materials Sector Funds (NYSE:IYM) wasn't far behind with a 30.8% rally for its previous 12 months. The consumer staples sector, healthcare and utilities names - all defensive in nature - weren't even in the top half of the sector performance rankings; none had returned more than 11% for the previous 12 months. (For more on ETFs, read 5 Ways To Find A Winning ETF.)

What a turnaround in the meantime.

Since March 31, 2011, the Health Care Select Sector SPDR (NYSE:XLV) has been rolling, up 7.4%. The Consumer Staples Sector SPDR Fund (NYSE:XLP) isn't far behind with its 7.2% gain, and the iShares Trust Dow Jones Telecommunications Sector Index Fund (NYSE:IYZ) is in the number-four spot with a 5.8% rally over the last couple of months. Nestled between the second and fourth place performers is the iShares Trust DJ US Healthcare Sec Index (NYSE:IYH) with a 7.0% gain in third, and the fifth place performer is Utilities Select Sector SPDR Fund (NYSE:XLU) with a 5.7% gain.

And where do the prior leaders, energy and materials, stack up since the end of March? They're at the very bottom of the pile, hanging out with the financial stocks. All of them are in the red.

Were it one week, or even two weeks, we could chalk up this proverbial changing of the guards to mere volatility. It's going on two months though - that's called a trend. And in this case, the trend clearly favors safe and stable names, and disfavors risky and economically sensitive arenas. It's an important clue to heed, as it's a glimpse of what investors are thinking and doing with their dollars. (For more, check out Keep It Simple - Trade With The Trend.)

The Bottom Line
The actionable message here is up to the individual investor, but at the very least it's something everyone should understand is going on. More than that though, considering the 'sell in May and go away' advice is usually intended to persist through September and into October (when stocks generally find a bottom), investors may find it useful to actually follow the lead and replace some of their higher risk stuff with lower risk holdings for a few months. It may only mean a few percentage points worth of difference, but every bit helps.

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