Broker Talk: Cyclical Sector Allocation Is Back (Broker Talk)

Posted by Eric LeRiche | July 4, 2009 .

The recent market weakness might be making some investors nervous, but it also affords them an opportunity to pick up investments in cyclical sectors at more attractive prices, the brokerages say.

Who’s Talking: Marc Zabicki, senior market strategist, Ameriprise Financial

The Gist: The market’s “extraordinary” rally that started in early March cooled off in the last two weeks of June, but that’s no cause for alarm, Zabicki says. In his view, the correction is overdue and, he says, it should be modest in nature.

“We believe the February and early March trading represented extraordinarily irrational expectations that have since been corrected by a sensible assessment of the business cycle,” the strategist says. “We believe market sentiment and renewed realization of fundamentals will keep the current bout of equity weakness relatively contained.”

With the market looking to be range-bound in the near term, investors would do well to take advantage of the lower stock prices and adjust their portfolios to reflect a more balanced allocation between cyclical and defensive sectors.

In fact, Zabicki upgraded early cycle sectors like industrials (to Overweight from Equal Weight) and energy (to Equal Weight from Underweight) while downgrading more defensive sectors such as consumer staples (to Equal Weight from Overweight) and utilities (to Underweight from Equal Weight).

“In our view, these shifts bring our U.S. equity allocations more balance, with no bias toward cyclical or defensive exposure,” Zabicki says.

Here’s how Ameriprise now weights the 10 sectors of the S&P 500:

Sector	Weight
Consumer Discretionary	Underweight
Consumer Staples	Equal Weight
Energy	Equal Weight
Financials	Overweight
Health Care	Overweight
Industrials	Overweight
Information Technology	Equal Weight
Materials	Underweight
Telecom	Equal Weight
Utilities	Underweight

Who’s Talking: Brad Sorensen, director of market and sector analysis, Charles Schwab Center for Financial Research

The Gist: Like Zabicki, Sorensen sees the recent market weakness as an opportunity to “play the pullback” and increase exposure to more cyclical stocks at cheaper prices.

“The impressive overall market rally from the March lows has stalled, while the cyclical areas that had benefitted from hopes of an economic recovery have pulled back,” says Sorensen. “However, in every situation lies an opportunity: Investors looking to make some shorter-term moves could benefit from buying stocks and funds at lower prices.”

However, in contrast to Zabicki, Sorensen takes a slightly less balanced, more pro-cyclical view when it comes to sector allocation. Schwab continues to believe that global reflationary policies, combined with the possibility of a continued weakening of the dollar, will benefit the more cyclical technology, industrials and materials sectors. In contrast, they believe defensive-oriented consumer staples, telecommunication, and utilities sectors will underperform.

The differences between Ameriprise’s more balanced weighting and Schwab’s more aggressive outlook can be seen in their respective views of some key sectors. For example, where Ameriprise advocates overweighting financials, Schwab calls the sector at Market Perform (Ameriprise’s equivalent of Equal Weight.) Schwab is also more bullish on Materials, which it puts at Outperform, vs. Ameriprise’s Underweight.

Here is Schwab’s recommended allocation to the 10 sectors of the S&P 500:

Sector	Weight
Consumer Discretionary	Market Perform
Consumer Staples	Underperform
Energy	Market Perform
Financials	Market Perform
Health Care	Market Perform
Industrials	Outperform
Information Technology	Outperform
Materials	Outperform
Telecom	Underperform
Utilities	Underperform

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