It's easy to get caught up in recent stock market action. Then there are investment advisors who often go to the other extreme, urging their clients to ignore current events and think "long term." The correct answer is somewhere in between.

Today I want you to think back, but not too far. Just a year's perspective can make a huge difference. As you will see, one sector is having a disproportionate impact on stocks.

Can You Guess the Sector?

I won't keep you in suspense: The lagging sector is Financial Services — banks, in other words. As a Money and Markets reader, you probably already know that. But you might be surprised at how well other sectors are performing ...

For the twelve-month period ending 10/31/11, the SPDR S&P 500 ETF (SPY) had a total return (share price plus dividends) of +8 percent. That's right in line with the index, less SPY's tiny expense ratio.

Now let's drill down by sector. SPDR makes it easy with their "Select Sector" ETF family, which neatly separates all 500 index constituents into nine sectors. Here are the twelve-month total returns for those ETFs.

Consider these numbers with the 8 percent return of SPY as your benchmark, since it is a weighted average of all the sectors.

What you'll notice is that six of the nine sector SPDRs had "above-average" one-year results. The Energy, Technology, Consumer Staples, Utilities, Health Care, and Consumer Discretionary ETFs all managed to beat SPY. Energy in particular had a great run.

Energy stocks are doing well. Can you guess why?

The laggards: Industrials, Materials, and Financials. Here's why.

Industrials underperformed for the same reason Energy did well: Higher oil prices. XLI includes airlines and other transport stocks that suffer when fuel prices go up.

Materials is a relatively small sector with limited influence on the broad market. Some of the mining and agribusiness stocks had impressive returns, but losses in the steel group kept XLB below-average.

The Financials sector, as defined by XLF, includes large-cap banks, insurance, brokerage and related companies. Few members of this group did well in the last year — and some big names performed horribly:

Not such a great stock lately.

•  Bank of America (BAC) -40.1 percent

• •  Goldman Sachs (GS) -31.3 percent
• •  Morgan Stanley (MS) -28.5 percent
• •  Citigroup (C) -24.2 percent
• •  Charles Schwab (SCHW) -19.1 percent
• •  Genworth Financial (GNW) -43.7 percent

Not so long ago, a portfolio of these stocks would be called "blue chip." Some (not me) may even have considered it "conservative." The last year ... not so much.

Am I saying everyone should abandon Financials and embrace Energy? No, not at all. Results this far below average (or above average) won't necessarily stay that way. Statisticians call it "regression to the mean."

My point is this: Above-average investment performance isn't just a result of identifying the winners. Avoiding the losers is equally important. A portfolio composed of every sector except financials could have done pretty well this last year.

As for the next twelve months ... we don't know yet. Much depends on the outcome of Europe's banking crisis and the global economy.

You can improve your odds of success, though, by keeping an eye on sector ETF action.

Source: moneyandmarkets.com

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