Sunday, July 12, 2009

Sector Update for July 12th


Last week's sector review concluded that "Having failed to reach the range highs and significantly weakened thereafter, the market appears poised to test its range lows; I would not be surprised to see us take out those lows--particularly if new 20-day lows among stocks continue to outnumber fresh 20-day highs." We did, indeed, move below the May/June lows in the S&P 500 Index, continuing the intermediate-term correction.

Above we can see how Technical Strength, a proprietary quantitative measure of short-term trending, has weakened across the eight S&P 500 sectors that I follow weekly. Recall that, for each sector, Technical Strength varies between +500 (strong uptrend) and -500 (strong downtrend), with values between +100 and -100 suggesting no significant directional tendency.

As the chart above indicates, we see no bullish trending among the sectors. The defensive health care sector is the only one not in an outright downtrend. Note the significant downtrend in the energy sector, which is reflecting relative weakness among commodities. We also are seeing significant weakness among financial and homebuilding shares, reflecting doubts regarding economic recovery. Here are how the numbers shake out as of Friday's close:

MATERIALS: -240
INDUSTRIAL: -280
CONSUMER DISCRETIONARY: -300
CONSUMER STAPLES: -240
ENERGY: -400
HEALTH CARE: +0
FINANCIAL: -360
TECHNOLOGY: -260

As long as the number of 20-day lows among stocks is expanding and we're seeing continued weakness in the Technical Strength measure, it is premature to go bottom fishing in stocks. That having been said, I will be looking for the possibility that selling could dry up and stocks could ultimately stay within their May-June range, frustrating the growing contingent of bears. If that materializes, we could get a nice intermediate-term buying opportunity for a rotation back into that range. A flush out move below this past week's lows, expanding the number of stocks registering fresh 20-day lows, would negate this range scenario.

As always, I will be tracking the indicators, including the Technical Strength of my basket of 40 stocks, via Twitter prior to market opens (follow here). An additional review of market indicators will follow shortly.
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