Tuesday, December 4, 2007

Financials or Tech: Which would you prefer?

S&P 500 Financial Index vs. S&P 500
No Capitulation in Financials
The above chart shows the relative performance of the S&P 500 Financials vs. the S&P 500. Given the well-publicized subprime problems, the sector is not surprisingly oversold.

Using the technique shown in the sidebar (titled Reversing Engineering a Manager's Macro Exposure) I imputed the average financial sector exposure of 22 US large cap blend equity mutual funds. These 22 funds can be thought of as a composite of the S&P 500-like mandate funds from the largest mutual fund complexes. As you can see from the chart, mutual funds have been overweight the sector and appear to be increasing their weight.

Large cap blend mutual fund managers, as a group, are finding value in Financials and there is no sign of panic over the subprime meltdown in their behavior.

S&P 500 Technology Index vs. S&P 500

Tech looks constructive
By contrast, this chart shows that the relative returns of the S&P 500 Technology Index vs. the S&P 500. The Tech sector rebounded in the Summer of 2006 and has been in a relative uptrend since the the Summer of 2007. The sector has pulled back but the relative uptrend remains intact.

The same mutual fund analysis shows that the average US large cap equity blend mutual fund is roughly market weight the sector. From a sentiment analysis viewpoint, this gives the Tech sector room to resume its leadership trend that it began a few months ago.

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