Last week was an ugly one for the stock market. The Standard & Poor's 500-stock index fell 3.7%, while the Nasdaq, S&P MidCap 400, and S&P SmallCap 600 indexes declined 6.5%, 2.8%, and 3.4%, respectively. What's more, 110 (85%) of the 129 subindustries in the S&P 500 fell during the week.
It doesn't get much worse than this. In fact, since S&P introduced the Global Industry Classification Standard in 1995, more than 85% of the subindustries have declined for a full week only six times—the highest reading was 98%, recorded on July 27, after which the S&P 500 gained 7.3% before the trend again turned against us.
A Little Perspective
Just how bad is a reading of 85%? On average, only 37% of all subindustries declined in any week since 1995. Readings above 78% are outside of two standard deviations from the mean, indicating an extreme level of pessimism, in my opinion (by definition, 96% of all observations fall within two standard deviations).
Take a look at the accompanying chart. On a rolling, 13-week basis, which is a bit easier to visualize since it smooths out weekly fluctuations, the number of S&P 500 subindustries posting declines now stands at 55%. This level is higher than one standard deviation (which contains 67% of all observations since 1995) above the 12-year average of 31% and is rapidly heading back up to two standard deviations. Should this end up being an equally distressing week for investors—possibly from higher-than-expected increases in reports on the core producer price index (scheduled for Nov. 14) and the consumer price index (Nov. 15)—we may see this percentage of S&P 500 subindustry indexes again become extremely "oversold," meaning prices have fallen too far. If that were to happen, it would signal to me that while the intermediate correction in the stock market, which has seen major indexes move well below their recent highs, may still be in place, equities may be due for a short-term advance.
And the Last Shall Be First
Should a bounce materialize, which subindustries are expected to lead the way? Technicians tell me those groups that held up best during market downturns are typically the ones that rebound quickest when the market recovers. Of course, past performance is no guarantee of future results.
Before listing these stalwarts, let's take a quick glance at the slackers. As of Nov. 9, 43% of the 129 subindustries in the S&P 500 were in bear markets, having fallen more than 20% from their week-ending highs during the past two years, with the five worst being Homebuilding (which tumbled 71%), IT Consulting & Other Services (down 46%), Real Estate Management & Development (also off 46%), Thrifts & Mortgage Finance (down 40%), and Electronic Manufacturing Services (down 39%). And even though all 10 sectors in the S&P 500 are below their weekly highs over the past two years, only one is in bear-market mode. Yes, you guessed it: Financials.
It's a surprise then, that despite the market's overall decline during the past several weeks, seven subindustries are trading at their week-ending highs of the past two years: Casinos & Gaming, Coal & Consumable Fuels, Electrical Components & Equipment, Health Care Services, Household Products, Independent Power Producers & Energy Traders, and Oil & Gas Drilling.