In the last writing I mentioned the market in general is expected to remain in the fair value range with a higher chance of moving positively than negatively. While this may hold true for the market overall it might be an entirely different story for the individual sectors.

Where we can calculate fair value and corresponding over and under value levels for the market, we can also calculate these values for each of the 10 individual sectors. The 10 sectors we consider are:

1. Consumer Discretion

2. Consumer Staples

3. Energy

4. Financials

5. Heathcare

6. Industrials

7. Matewrials

8. Technology

9. Telecom

10. Utilities.

Each sector has had different experiences throughout 2011. Can you imagine how different healthcare looks with the controversy surrounding Obama care versus the excitement of technology and new creations such as the iPAD and advancement in smartphone technology.

At the end of 2011, one sector ended up overvalued while others are still looking to reach fair value. In order of valuation around fair value they rank as follows, (Overvalued is more than 120% of fair value, fair value is 119% to 79% of fair value, undervalued is 80% or more below fair value):
1. Technology                     33.9%       overvalued
2. Consumer Staples           4.7%       over fair value
3. Utilities                               4,1%        over fair value
4. Consumer Discretion    3.2%        over fair value
5. Telecom                              3.0%       under fair value
6. Industrials                         3.1%        under fair value
7. Materials                            3.2%        under fair value
8. Healthcare                         6.4%        under fair value
9. Fianacials                         12.8%        under fair value
10. Energy                             14.4%       under fair value

None of the sectors are undervalued and only one is overvalued. The rest are somewhere in the fair value range of 120% and 80% of fair value. Three are slightly above fair value and six are slightly under fair value. Potentially, there is a lot of room for appreciation in all but one sector. Maybe the opportunity in the market is not boring after all.

When making asset allocation decisions the positions relative to fair value can be used to identify potential growth. One thought would be that the potential for growth in energy is probably higher than technology because the companies in the energy sector are not being fully recognized by the market. They are under fair value. The sector’s current prices are undervalued. Whereas the opposite is true for technology; the market has over estimated the potential for technology and added a 33.9% premium which is 13.9 percentage points above the “normal” range so it is considered overvalued.

Nest time we will look at each sectors potential for 2012.

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