Sam Stovall's Sector Watch May 21, 2008, 12:01AM EST

Stocks: When the Rate Music Stops

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Average S&P 500 and Sector Percent Changes After Last Fed Rate Cut

Index Percent Changes After Last Fed Rate Cut

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Sector Standouts

Encouraged by the market's performances after the last rate cut, and digging a little deeper to see how sectors performed after the last cut, we see that the strongest price performances came from the cyclical Consumer Discretionary, Industrials, and Information Technology sectors in both the six- and 12-month periods, as they posted above-average price advances and frequencies of market outperformance.

The traditionally defensive sectors—Consumer Staples, Health Care, and Utilities—which normally held up well during rough patches in the market's performance, were underperformers in both periods, possibly as a result of investors' continued interest in the more cyclical sectors. Interestingly, Energy and Materials, today's sector leaders, historically maintained their leadership positions in the first six months after the Fed stopped cutting rates, but then slowed to become market performers during the 12-month period.

Remember, of course, that past performance is no guarantee of future results.

S&P's Equity Strategy Group has been raising the recommended exposure to cyclical sectors and reducing the suggested allocations to defensive ones. Since the beginning of the year, we elevated our investment outlooks on the Consumer Discretionary, Financials, Industrials, and Information Technology sectors, while downgrading our opinions on Consumer Staples, Health Care, and Utilities.

We currently have overweight recommendations on the Information Technology and Materials sectors, and recommend an underweighting on the Health Care and Utilities groups.

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 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	Ticker	S&P STARS Rank	Price (5/16/08)
Coal & Consumable Fuels	Peabody Energy	BTU	3	$79
Construction & Engineering	Fluor Corp.	FLR	4	$191
Diversified Metals & Mining	Freeport-McMoRan Copper	FCX	3	$124
Fertilizers & Agr. Chem.	Monsanto	MON	4	$125
Gold	Newmont Mining	NEM	4	$49
HyperMarkets & Super Centers	Costco Wholesale	COST	4	$73
Industrial Gases	Airgas	ARG	5	$60
Integrated Oil & Gas	ConocoPhillips	COP	5	$92
Marine	Kirby Corp.	KEX	4	$60
Oil & Gas Drilling	Noble Corp.	NE	5	$65
Oil & Gas Equip. & Svcs.	Superior Energy Services	SPN	5	$54
Oil & Gas E&P	Swift Energy	SFY	5	$60
Railroads	CSX Corp.	CSX	4	$66
Steel	Allegheny Technologies	ATI	4	$82

Source: Standard & Poor's Equity Research

Stovall is chief investment strategist for Standard & Poor's Equity Research Services .

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