Sunday, November 01, 2009

Sector Update for November 1st

Last week's sector review noted a pullback to a multiday trading range as part of what appeared to be a topping process following September's momentum highs and October's price high. That scenario continued to unfold this past week, as we broke sharply below the trading range and closed near the week's lows. As we can see above, this has turned five of the eight S&P 500 sectors that I track bearish in Technical Strength, with the others giving neutral readings.

Note: Technical Strength is a proprietary measure of short-term trending; sector readings vary from +500 (strong bullish trend) to -500 (strong bearish trend), with scores between -100 and +100 indicating a neutral trend.

Here are the individual sector readings as of Friday's close:

ENERGY: -100

What we see is relative strength among technology shares, which have seen strong earnings, and the defensive consumer staples stocks. Particularly weak have been financial stocks and economically sensitive raw materials shares. We saw a notable drop in strength week over week among energy stocks, reflecting commodity weakness amid recent U.S. dollar strength.

Friday's considerable weakness following a stiff rally on Thursday was not a positive for the bulls. While it would not be unusual to see a short-covering bounce from here, I will be looking for further signs of bottoming before committing to a resumption of the bull market. At this juncture, I am not viewing the current correction as a fresh bear market, but as an interruption of a relatively new bull market--not unlike what we saw in early 2004 following a steep rally off the 2003 lows. But we'll let the incoming indicator data tell the story: trend indicators, along with strength and momentum measures, are updated each morning via Twitter before the market open. You can follow those here or keep an eye on the five most recent tweets on the blog page under "Twitter Trader".

Note that we're going into a Fed meeting this coming week; that should impact how we trade as we approach the announcement.