Monday, September 07, 2009

Sector Update for September 7th


Last week's sector review noted that Technical Strength, a proprietary measure of short-term trending, was bullish across the eight S&P 500 sectors that I follow weekly. It also noted persistent divergences at the market highs, however, and suggested that we be alert for reversal should the Technical Strength picture weaken.

We did, indeed, get that weakening, as stocks moved lower in the early portion of the week, bouncing back later. Whereas 30 of the 40 stocks that I track in my basket were in short-term bull trends at the end of last week, we see only 17 in such a mode at Friday's close. As the chart above indicates, we're seeing neutral trend modes for materials shares, healthcare, and financial stocks, with only very weak uptrends for energy and consumer discretionary shares. Only the defensive consumer staples sector qualifies as being in a solid uptrend.

Significantly, however, none of the sectors closed last week in short-term downtrends. Despite last week's drop, we continue to see a pattern of higher price lows in the stock market. I am alert to the possibility that the early week dip and subsequent bounce are part of the market's extended topping process--and particularly the possibility of putting in a lower, weaker price high. Should the market's late week rally stall at lower highs, I would be looking to fade that strength. Should the rally show continued momentum strength, I would expect at least one more test of the bull highs.

Here is how the sectors shaped up as of Friday's close:

MATERIALS: 40
INDUSTRIAL: 240
CONSUMER DISCRETIONARY: 180
CONSUMER STAPLES: 300
ENERGY: 140
HEALTH CARE: -60
FINANCIAL: 100
TECHNOLOGY: 180

Note that the commodity-sensitive energy and materials sectors dropped significantly in the last week, reflecting commodity weakness. The only sector to gain strength over the week were those defensive staples shares. In light of the current health care debate, it is notable that those stocks dropped significantly in their technical strength since last week.

All in all, it looks to me as though we are in a weakening bull market. The vigor of the follow through to the rally that started late last week will provide important clues as to how any possible correction will unfold. The most positive scenario for bulls would be a vigorous bounce toward bull highs, creating conditions for a relatively flat corrective period, such as we had in June and July.

As always, I will be tracking the trend status of the stocks in my basket via Twitter (follow the intraday tweets here) along with other key market indicators to see how that market follow through unfolds.
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4 comments:

heywally said...

Thanks for the updates as usual, Dr. Brett.

Not relevant to your post and feel free to not put this comment up but I have a suggestion; certainly not a complaint:

Please consider, in your twitters, not posting as many links to sites that discuss 'fundamental' 'news and speculation' as those links are already everywhere. A recent example would be 7:28 AM CT - Echoes of the 1930s? http://rurl.org/1vgm.; yet another comparison to the 30's and not very robust at that.

I know that you have a long term bearish viewpoint and see the same news and data that we all do every day -- much of it negative -- but to me, most of your value comes in your pure trading analysis, technical and psychological.

Thanks for considering and thanks for providing all of the output that makes you such an MVP in the trading arena.

Mike McCurdy

Brett Steenbarger, Ph.D. said...

Point well taken, Mike; thanks for the note!

Brett

DG's Trading Forum said...

Hi,

I like your sector updates, but I wonder if a line chart wouldn't be an easier way to visualize the week-to-week movements. Use a line for each sector and have the date along the x-axis and keep the y-axis as is.

abel said...

It feels like slack high water, using the NH portion of data in the NHNL stats, (52 week data).

http://www.csc.noaa.gov/text/glossary.html