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The Cody Blog: Cody on RM: Indices Hide Some Horrendous Action

Wednesday, August 02, 2006

Cody on RM: Indices Hide Some Horrendous Action

Indices Hide Some Horrendous Action
08/01/2006 1:42 PM EDT

One of the more fascinating aspects of the market during the last couple months has been how the major indices have hidden the meltdown that many sectors and geographies have experienced. Heck, as Doug Kass has been reminding people, the S&P 500 has been up six out of the seven months we've had in 2006.

I wanted to parse this phenomenon further, so we pulled a bunch of data (from May 10 through yesterday's close) on a bunch of disparate S&P 500 Spiders:

Consumer Discretionary/-3.50%
Consumer Staples/5.73%
Health Care/8.36%

Say what? I know there are sectors that are down much worse than those data reveal. A little further digging reveals the performance of market subsectors, as broken down by the disparate DJ U.S. indices:

DJ Index/Change

DJ US Tobacco/10.28%
DJ US Autos/9.88%
DJ US Fixed-Line Telecom/9.67%
DJ US Pipelines/7.65%
DJ US Soft Drink/4.77%
DJ US Electricity/6.66%
DJ US Gas Distr/6.57%
DJ US Utilities/6.31%
DJ US Beverages/4.34%
DJ US Real Estate Investment Trusts/3.09%

DJ US Recreational Products/-16.70%
DJ US Telecommunications Equipment/-18.02%
DJ US Building Materials & Fixtures/-20.02%
DJ US Industrial Suppliers/-21.49%
DJ US Mining/-22.36%
DJ US Business Training and Employment Agencies/-24.29%
DJ US Home Construction/-24.79%
DJ US Tires/-25.15%
DJ US Coal/-27.68%
DJ US Platinum & Precious Metals/-36.39%

And that's where things got really interesting. Starting with the winners, how about those autos being the highest outperformers? Street Insight's Doug Kass long ago called for GM's relative outperformance in one of his surprises lists, and back in early May, I commented that all the negativity in the sector made me want to buy the autos. But seeing autos on top of the list of outperformers just about made me fall out of my chair. Pipelines? Oil's hung tough, so seeing the pipelines up isn't a surprise. And defensive sectors like tobacco, soft drinks and even telecom service providers are also understandable because they tend to outperform in times of economic downturns.

And then we get to the juice, man. How about those precious metals! Again, I was flabbergasted to see a sector down nearly 40% like that -- and don't forget that one of the primary catalysts for my going to cash back in early May was the parabolic action in the precious metals. Sure wish I'd shorted some.

Coal, tires, employment agencies, mining, industrial suppliers, building materials -- oh my! Talk about cyclicals. You know my thoughts on the cyclicals and how everyone keeps telling us about how they're so "cheap."

The major indices are hiding what's been some horrendous action in these markets. It's obvious that many bulls are reeling because they've had exposure to many of these sectors that have been crushed. And as I've repeatedly noted (try that link on "cheap," for example), there are so many bears who keep buying into the "cheap" cyclical concept that many of them have been crushed and/or they haven't coined much money during this downturn.

That's why people have been so negative about these markets, despite the relative calm in the major indices.


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