The way investors classify securities into asset classes is one of their most important decisions and can have far reaching consequences for the investment community. The GICS methodology has been widely accepted as an industry analysis framework for investment research and consists of 10 sectors.
Certain sectors are considered cyclical and others considered defensive. In a slowing economy defensive sectors are expected to “outperform.” This week I take a look at two sectors normally considered defensive to see how they might perform in the expected slow growth economy of 2013.
Looking at a ratio chart of telecom/S&P 500 we can see that telecom has underperformed for most of 2012. The ratio chart may have had a false breakout below support in early December or, like tech, it may have triggered a bearish head-and-shoulders pattern. Telecom, being a defensive sector, is expected to outperform in a slowing economy. But if a topping pattern has been triggered, tech should be expected to have entered a long period of underperformance vis-?-vis the broader market.
Turning to utilities, the ratio chart makes clear that they have underperformed the broader market since September 2011. The recent breach of the March/September lows does not bode well for the ratio’s future performance but a small bullish head-and-shoulders pattern may have formed on the chart. A break of the descending neckline could be the catalyst needed for outperformance in 2013.
[Editor’s note: Check out Carlson’s website for a “sneak peak” preview offer on his newsletter.]
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