Sunday, September 07, 2008

Sector Update for September 7th

What a difference a week makes. The last sector update found the majority of sectors in modest uptrends, with evidence of sector rotation rather than strong upward trending. Over the past week, money has continued to flow out of stocks and most of our sectors have flipped from modest uptrends to modest downtrends. What this means in practice is that I'm viewing the market through two sets of lenses. One is the lens of the short-term trader, who is seeing the market weaken from day to day, week to week. (By Friday, for example, we posted over 2400 fresh 20-day lows among NYSE, NASDAQ, and ASE issues; a full indicator review will appear tomorrow AM and, as always, I will be updating the indicators prior to each trading day via Twitter). The other lens is at a longer time frame, which--so far--is showing potentially significant divergences between the current market action and the weakness that we saw at the July lows. In short, we're seeing more fear and selling than in the past few weeks, but fewer stocks are participating in that selling than at recent market lows.

So basically we have two scenarios: the first is that we've begun a fresh leg down in the market and will decisively take out the July lows across the major indexes. The second scenario--and, frankly, the one I'm leaning toward--is that the July through early September weakness is part of a bottoming process, with waning participation to the downside.

Here are the Technical Strength (trending) numbers for each of the eight S&P 500 sectors that I follow, with the percentage of stocks within each sector trading above their 50-day moving average (in parentheses):

MATERIALS: -80 (40%)
INDUSTRIAL: -200 (20%)
ENERGY: -460 (5%)
HEALTH CARE: -240 (30%)
FINANCIAL: +240 (64%)
TECHNOLOGY: -320 (19%)

We can see that the energy and technology shares are dramatic underperformers, as the market is pricing in the effects of slow/no growth in the economy. Consumer staples stocks are outperforming as defensive issues, but--interestingly--we're also seeing underperformance among health care shares. That may reflect renewed concerns about cost-cutting in that area in the wake of the Presidential election. Amazingly, financial shares are leading the pack; it will be interesting to see how they respond to the government bailout of FNM and FRE.

Note how the percentages of stocks above the 50-day moving averages is quite discrepant across sectors: once again, we're seeing plenty of sector rotation. At this point, the percentages are not near levels normally associated with intermediate-term market bottoms, despite the fact that we're at fresh annual lows in the NYSE Composite Index and near those lows in the S&P 500 Index. This is yet another reflection of the divergences I'm seeing in the current market. Either we have much further to go on the downside, or the majority of shares have put in their lows for the current bear cycle. I'll be tracking the indicators closely to handicap the odds of these very different scenarios; stay tuned...


Indifferent said...

Nice analysis Dr. Brett. Thursday's and Friday morning's selling had the appearance of capitulation to me. With most financials well off of their lows, it seems we're setting up for a more extended rally. And with the FNM/FRE news officially hitting the wires now, I think it will be difficult to be short financials in the near future.

I also wouldn't count out a boost to stocks stemming from the dollar rally underway -- higher dollar pointing to a lower probability of Fed raising rates. I still show the Russell stronger than the Dow and S&P in the longer time frames, so I'm looking for the small caps to resume their outperformance if the dollar holds its bid.

SSK said...

HELLO BRETT, Nice articulate post regarding the how the features of two different timeframes offer some conflicting data.Open interest in the ES on friday only increased by about 7961 contracts even though we had a bounce off of the low by 36 pts. The longer term divergence certainly points to a bottoming process if open interest doesnt increase on new selling pressure below the july lows. There is a nice buying tail on fridays profile though.I would like to see a retest of the 1217-1220 area in the days to come, before we move back to test the 1305 area. Thanks agian for your insights, Best,SSK

Indifferent said...

This should be a fascinating week - ES trading at 1270 on 50k contracts in only 15 minutes of prints on Globex. But Euro currency's only up 20 pips, on what should be pretty dollar-bearish. This could say a lot about what the currency markets were already pricing in, leading up to this announcement.

Eric said...

The waning participation to the downside. Seems to coincide with a waning negative Sentiment as the same Psychological MEME's, keep being repeated to less and less effect.... or is it affect.

But... We could see 2 big Hedgies Blow up this week, and it could take us lower...

As always, thanks for your continued input, to the global .. Chatter.

Joshua said...

Dr. Brett,

Is there a reason why you do not use the Utilities (XLU) sector in your sector trend/rotation analysis?


Brett Steenbarger, Ph.D. said...

Thanks for the market perspectives in the comments, and thanks for the support SSK. Joshua, the utilities are a mixed bag following energy and rates; they're also not a sector I trade. I do think including them could possibly add info, and I'll look into that--