[Note: This article was initially published on IndexUniverse.eu] 

The 2009 equity market rebound continues apace. The DJ Stoxx 600 European equity index, which comprises large-, mid- and small-cap companies from 18 European countries, has rallied by nearly a third from its early-March low.

Three months ago, we took a sector-based look at the bear market, reviewing the performance of the 19 DJ Stoxx 600 supersector indices. The review showed that the three "FIRE" sectors—finance (including banks), insurance and real estate—and the basic resources sector had been the worst performers during the 2007-09 bear market.

How do things look a quarter later, and with the mood amongst equity investors dramatically better?

The table below gives the 2008-09 low point, and its date, for each supersector index in the DJ Stoxx family. The fourth column shows the percentage decline from the 2007-08 index peak. Finally, columns five and six show the most recent index level for each supersector, and the percentage increase from the recorded lows. We quote the euro-based return indices in each case (i.e., allowing for the reinvestment of dividends), as these are used by most European equity-sector ETFs as their underlying benchmarks.

From Losers To Leaders

Seventeen of the 19 DJ Stoxx 600 supersector indices saw their lows for the bear market (so far!) in March 2009. The sectors that have rebounded the most during the two-month equity market rally are those that were the worst hit during the bear market.

The sector leaders during the upturn are, in order of the percentage increase from their lows: banks (+97.61%), insurance (+71.33%), and basic resources (+63.95%). These sectors were, respectively, first, third and fourth in terms of the magnitude of their bear market declines, with banks suffering a collective loss of over four-fifths of their market capitalisation.

Conversely, the sectors showing the lowest percentage increase from their lows are those that proved the most defensive during the downturn. Health care (+7.51%), telecommunications (+7.99%) and food & beverage (+15.24%) were, respectively, the first-, third- and second-best performers during the bear market.

A switch from bear to bull market is often marked by a change in sector leadership, with new companies coming to the fore, while the leaders in the previous bull market fall behind. The current rally shows no such change in leadership so far, with the financials and commodity-related stocks that powered the 2003-07 bull market once again in the lead.

According to Anthony Bolton of Fidelity in a recent Bloomberg interview, a bull market has indeed started, and financials should lead the way. Other observers point out that March and April have seen a significant rotation by investors from defensive sectors, such as health care, consumer staples and utilities, into the more economically sensitive areas of the market, which had suffered the most during the downturn.

More sceptical commentators argue that the fact that the bear market losers are leading the current rally is merely a sign of a technical rebound, driven by short-covering. According to David Rosenberg of Bank of America Merrill Lynch, quoted on the Option Armageddon blog, the 50 most heavily-shorted stocks in the US were the ones that outperformed the market most in April.

A timely reminder of the magnitude and duration of typical bear market rallies came from Henry Blodget in a Business Insider article, posted May 3. Blodget notes that the 1929-32 bear market saw a number of sharp rallies, whose average magnitude was 30%, and average duration 70 days. With the DJ Stoxx 600 index up 32% in 56 days from its 9 March low, we're close to the point where—if we're still in a bear market—a typical rally might falter.

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