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:


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.