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State of Recovery

Following its Feb. 19 high, the S&P 500 Index has recovered nearly 33% since hitting a bottom on March 23.

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According to John Authers of Bloomberg, stocks clearly have breadth on their side now with 90% of the stocks in the S&P 500 hitting 50-day moving averages. This indicator has performed quite well in the past, predicting good returns in the near term (three, six and 12 months post-firing).

Sector analysis

By sector (and using the February "market top" date as the starting point), we have the following picture. Of the 11 market sectors, there is a clear outlier - real estate, which is still down by an astounding 62% from the top. The second worst is financials, down by about 28%, followed by energy with a 27% decline. Industrials are next by with a 24% decrease. These sectors are still in bear market (more than -20%) territory.

The next layer is sectors in correction territory (i.e., between -10% to -20%), which are: utilities at -14%, materials at -12% and staples at -10%. The sectors which have more or less recovered are communication services at -6%, information technology at -3%, health care at -1% and, surprisingly, consumer discretionary at 0%.

Chart

The following is a chart of recovery since the latest market bottom on March 23. The strongest recovery has been zero in the material sector, followed by energy. The weakest is real estate, followed by consumer staples, which had not been affected too much by the bear market in the first place. Material and energy have clearly been hunting ground for bottom fishers. Real estate continues to be shunned, so it may appreciate the most once a recovery comes.

Discussion

We are most likely in a recession now, which could get pretty severe. However, markets are forward-looking. While a debate rages on about if the recovery has begun or if the worst is still to come, its worth looking at the schematic below to gauge how to position ourselves.

If you think things are going to get worse, it's better to stay or shift into defensive sectors such as health care and consumer staples. However, if you think the recovery has started, you may want to start moving into financials and, dare I say, real estate. That's where the biggest bargains are. Within this industry, more defensive subsectors, such as single-family home builders and apartment real estate investment trusts, are more appealing than retail or commercial office space REITs.

Source: Fidelity.

In none of these options interest you, may I suggest gold. The SPDR Gold Trust (GLD) exchange-traded fund has outperformed the S&P 500 since the market top. If the situation worsens, it may be a life preserver.

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Disclosure: The author is long the SPDR Gold Trust ETF.

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This article first appeared on GuruFocus.