Success in investing can many times come down to avoiding the major losers rather than always hitting home runs with one's winners. Correct sector allocation plays an important role in sidestepping potential landmines that out there in the market. Sector relative outperformance trends can last for years and finding stocks that outperform the index while being in a underperforming sector is a tough task. Let's take a somewhat extreme example by looking at health care and energy sector performance in 2014. On an equal-weighted, USD basis, the MSCI World Index health care sector is up over 17% year-to-date while the energy sector is down over 22%. The fortunes of these two sectors couldn't have been more different in 2014.
Now as a stock picker, which sector would provide you the most opportunities to outperform? Health care, of course! A remarkable 79% (99 out 125 stocks) of health care stocks have outperformed the MSCI World Index over the past 252-trading days (one year). Meanwhile, only 11% (12 out 113 stocks) have managed to outperform the MSCI World Index over the past 252-trading days. You have been about 9x more likely to pick a winner in health care over the past year than you are picking a winner in energy. Overall, 44% of the stocks in the MSCI World Index have outperformed the MSCI World Index over the past year.
The list of sectors that may be more likely to underperform are probably not too surprising. Below are charts of some of the ten sectors using our proprietary point and figure charting methodology and based on these charts energy, materials, telecommunications and utilities all look like they are in downtrends relative to the MSCI World Index.
To play the energy sector now, it still seems like you are trying to catch a falling knife. The underperformance has been dramatic which could lead to a period of relative outperformance in the short run. However, over the long-run, energy looks to be a serial underperformer in the future.
After a multiyear period of strong out performance, materials has been a major relative underperformer. Support has been breached and there isn't anything from a technical perspective to get excited about.
After looking like it had found support, telecom has since broken down. Telecom was actually the 4th best performing sector year-to-date, however, from a longer term perspective it looks like it is firmly in a downtrend against the benchmark.
Last but not least is the utilities sector. Utilities had underperformed for a few years before this previous year. YTD, utilities are the third best performing sector. In the chart below, you can see this years outperformance in the last column of Xs. It wouldn't be surprising if next year the energy sector played out in a similar fashion to how the utilities sector performed this year. However, over the long-term, the utilities sector continues to look like its a strong relative underperforming downtrend.