Making Sense of the Market's June Swoon

The S&P 500 headed south after setting a record early in the month. What does that signal for the coming months?

As of June 28, the S&P 500 index declined 1.6% on the month, battered by higher oil prices, a rise in the yield on the 10-year note, renewed concerns about inflation, the prospect of a delayed first cut in the Fed funds rate until next year, and the reawakening of the subprime worry.

Come to think about it, the S&P 500 was off less than 2% despite these events. Maybe the market's not willing to throw in the towel just yet.

S&P 500 Sector Performances (% Change)
Sector/Index June Second Qtr. YTD
Consumer Discretionary (1.6) 3.6 2.6
Consumer Staples (2.1) 2.2 3.8
Energy 1.2 13.7 15.7
Financials (3.5) 2.2 (1.3)
Health Care (3.2) 5.0 5.7
Industrials (0.2) 9.2 9.8
Information Technology 1.0 10.5 9.3
Materials (1.4) 5.9 14.8
Telecommunication Services (3.4) 6.0 12.8
Utilities (5.6) (1.5) 6.9
S&P 500 (1.6) 6.0 6.2
S&P MidCap 400 (2.0) 5.8 11.6
S&P SmallCap 600 (1.3) 5.4 8.5

On May 30, the S&P 500 eclipsed its old high set on Mar. 24, 2000. By June 4, it had set three more new highs, finally topping around 1,539. The subsequent intra-month decline to the 1,490 level was predicted by both Mark Arbeter, S&P's chief technical strategist, and history.

As I have previously noted, since 1945 the S&P 500 typically gives ground in the month after finally recouping all that was lost in the prior bear market, but then advances by more than the long-term average in the three and six months after setting that first new high. So, in fact, the S&P is performing quite typically.

The swoon was also not confined to the upper level of the index. Eight of the ten sectors in the "500" declined, with Utilities suffering the greatest pullback at 5.6%; Financials weren't too far behind. Only Energy and Info Tech companies rose on the month. Two out of every three subindustries in the S&P 500 fell in June, with Homebuilding and Homefurnishing Retail, as well as Office, Industrial, and Retail REITs, posting declines in excess of 10%. On the flip side, Photographic Products and Automobile Manufacturers recorded advances of 11.5% and 20.7%, respectively.

The Disappointing Quarter

Finally, the S&P MidCap 400 and SmallCap 600 Indices also declined in June, but not as much as many expected who are calling for the imminent demise of their seven-year leadership run.

On Monday, July 2, we entered the third quarter of the year, notorious for its disappointments. (To be sure, the first trading day of the month brought a nice pop for U.S. equity indexes.) Since 1945, the S&P 500 advanced an average 0.3% in the third quarter, as compared with an average increase of more than 2% for each of the remaining quarters.

August and September are the unruly months, but July isn't much to brag about either, since it is only the seventh best performing month by historical standards. It might not be a total bust, in our opinion, as investors now focus on second-quarter earnings. S&P equity analysts expect a 5.7% year-over-year increase in S&P 500 operating results, led by the Health Care, Tech, and Telecom sectors.

Industry Momentum List Update

Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the 136 sub-industries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).

Subindustry Company S&P STARS Rank Price (6/28/07)
Apparel, Accessories Quiksilver (ZQK) 5 $14
Auto Parts & Equipment Johnson Controls (JCI) 3 $117
Commercial Printing R.R. Donnelley (RRD) 4 $43
Commodity Chemicals Lyondell Chemical (LYO) 3 $37
Computer Hardware Apple Inc. (AAPL) 4 $122
Construction Materials Vulcan Materials (VMC) 2 $115
Diversified Metals & Mining Freeport-McMoRan Copper (FCX) 3 $82
Fertilizers & Agr. Chem. Monsanto (MON) 3 $67
Footwear Nike (NKE) 4 $58
Integrated Telecom. Svcs. Citizens Communications (CZN) 5 $15
Internet Retail (AMZN) 2 $69
Metal & Glass Containers Ball (BLL) 4 $53
Technology Distributors Arrow Electronics (ARW) 3 $39
Tires & Rubber Goodyear Tire (GT) 2 $34
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