Winners & Losers: 2 Big Trends Driving S&P 500 Sector Performance

McCullough: Let’s move on to the sector studies. This is important.

I’ve been on the road a ton in the past few weeks meeting with institutional investors, and one thing that people are pushing me on is whether they should be buying REITs and Utilities (XLU) because our Growth, Inflation, Policy (GIP) model says U.S. growth is slowing.

But I don’t want to do it yet. Why? Because I thought bond yields could go higher. And what did they do? They went higher.

So I’m happy I didn’t signal buy Utilities. Look at the sector performance in the month-to-date and look at Utilities (see table below). They’re the worst performing place you could be in the top-9 sectors.

Obviously, if you’ve been long them year-to-date it’s an even bigger problem because Utilities are down -5%. Meanwhile, our favorite three sectors are the only three that are in the green this year.

This is why we’re building credibility. We have a process that delivers results. If you have no process that’s another thing. That’s like 90% of the people you see for free on TV. You get what you pay for.

You need a process. And even better, if you have a reason that’s fundamentally-driven for not buying Utilities with a quantitative overlay, now we’re talking.

So, at the end of the day, I am more interested in buying Utilities but much closer to the end of the Summer would be my preferred timing. That's when our predictive tracking algorithm says U.S. inflation starts to rollover once again at the same time as growth slows.

But I'd only be interested in buying Utilities if that’s confirmed by our fundamental and quantitative research over the coming months. Remember, we’re data dependent so as the data changes we change.

Getting back to Utilities. The sector was down -2.5% on the day yesterday and Financials (XLF) led the way on the upside. That’s the way that works. Bond yields go up. Financials go up. Utilities go down.