Sunday, February 08, 2009

Sector Update for February 8th

Last week's sector update reported that the eight S&P 500 sectors that I assess for short-term trending were largely in a moderate downtrend mode, with economically sensitive sectors particularly weak and defensive sectors displaying relative strength. I concluded, "Unless we can sustain a situation in which new highs outnumber new lows and confidence comes into the Financial, Materials, and Consumer Discretionary sectors, I expect us to be testing recent market lows." We did, indeed, see prices move toward the bottom their recent range in the low 800s in the S&P 500 futures contract, but firmness late in the week and Friday's sharp rally on strong money flow helped us hold support once more.

Recall that the Technical Strength measure of short-term trending varies from +500 (very strong uptrend) to -500 (very strong downtrend) for each sector, with numbers around zero (-100 to +100) representing a relative absence of trend. Here's how we're looking as of Friday's strong close:

MATERIALS: -220 (59%)
INDUSTRIAL: -120 (52%)
ENERGY: +180 (88%)
HEALTH CARE: +140 (93%)
FINANCIAL: -140 (44%)
TECHNOLOGY: +260 (84%)

We can see that, despite the rally late in the week, the sectors are nowhere near levels associated with strong uptrends and thus cannot be considered overbought. Indeed, we still see residual weakness among Materials and Consumer Discretionary shares, as well as Financial issues, though their Technical Strength has improved. Technology is the one sector displaying a clear uptrend; note that the NASDAQ Index is at 2009 highs, even as other indexes lag.

As we look at a longer time frame and the percentage of stocks from each sector trading above their 20-day moving averages, as reported by Decision Point, we see that all of the sectors show a majority of shares trading above that benchmark, with the exception of Financial stocks. Indeed, looking even further out, we can see that over 50% of all S&P 500 stocks are now trading above their 50-day moving averages, up from about 25% early in the week.

This suggests that, with continued support in the low 800 range and Friday's strength, the intermediate-term trend has turned bullish. Among the indicators that I follow daily via Twitter, we will want to see Demand exceed Supply going forward and 20-day new highs outnumber new lows in order to sustain the uptrend and challenge the 2009 highs.