In part I. you have seen how correlation of two sector ETFs can be used to predict SPY results. In part II. I’ve taken this to a next level and looked at absolute sector performance to improve SPY next day results. I checked a number of different ways. I looked at one sector outperforming another. I looked at the strongest sector only etc. At the end I find it best to look at the performance of a specific sector. The problem looking at specific sector strength, it changes over time. During the recent bull run it’s been important that financials were among the leaders. Where as in the past other sectors have been leading the bull market. Weakness in specific sectors such as healthcare or utilities has been most predictive in identifying good times for the stock markets.  Sector ETFs carry important information in terms of market health.  A lot of money is still invested in long only funds. For these funds the only way to “hide” during bear markets is to park money in defensive sectors (=low volatility and high dividend). Typically these companies are part of the utilities or healthcare sector.

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