The worst sector in America has a lot of problems…

For starters, this sector is in a state of freefall. It’s dropped 27% in the last four months.

You’d think, after chopping off a quarter of its market value, this sector would be cheap… It’s not. In fact, this sector is the third-most expensive in the country (in relation to its median valuations).

This sector is also extremely sensitive to a weakening economy. In the 1970s bear market, it fell 53%. During the dot-com crash, it fell 49%.

The sector I’m talking about is leisure goods.

So what’s in this sector?

The DataStream Leisure Goods Index contains videogame companies (Electronic Arts and Activision), toy companies (Hasbro and Mattel), camera makers (Eastman Kodak), navigation manufacturers (Garmin), and audio/electronics makers (Harman International).

Aside from a weak rally attempt last November and another this month, the sector has gone straight down. The rally in November was short-lived, and I believe this one will be as well.

How much farther could the sector fall? Well, it would have to fall another 31% from its current level in order to match the 50% fall it experienced during the previous two major recessions.

And trend and a weakening economy aren’t the only reasons this index is headed lower…

Take a look at the following chart of the Leisure Goods Index versus its price-to-earnings ratio:

Leisure Goods Makers Are Expensive

The P/E ratio spiked to never-before-seen highs before correcting at the end of last year.Even after the correction, this stock’s P/E ratio is still as high as it was during the start of the 1973 and 1998 bear markets. Also, the index’s price-to-book value is 27% above its median level.Leisure goods stocks are expensive and selling discretionary items at a time when a weakening economy has put a stranglehold on many consumers’ budgets.Unfortunately, there is no easy way to short sell the entire Leisure Goods Index. The PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) holds different stocks. And in fact, PEJ doesn’t seem all that expensive. It has a P/E of just 10.3.But if you’re brave and really itching for a short sell, I would recommend shorting one of the more expensive companies in the index… Here’s a table of the top four:

Company	Market Cap (billions)	Price/ Earnings	Price/ Book	Yield
Eastman Kodak	$5.3	n/a	3.8	2.7%
Electronic Arts	$15.5	n/a	3.8	0%
Activision	$7.9	29.5	5.4	0%
Garmin	$13.6	18.8	8.7	1.2%

At the very least, avoid this sector until it gets much cheaper.