Sunday, December 06, 2009

Sector Update for December 6th

Last week's sector update found that Technical Strength, a proprietary measure of short-term trending, was mixed last week, with many sectors showing no distinct trend. Financial shares, however, displayed an ongoing weakness at odds with the rest of the market.

This week saw notable strengthening among Technology and Industrial shares, but fresh weakness among Energy stocks. While Financial issues improved from their weak readings of the prior week, they remain performance laggards; Health Care stocks have sustained their prior strength. Overall, we have two of the sectors (Materials and Consumer Staples) showing no significant trend; four sectors in uptrends (Industrial, Consumer Discretionary, Health Care, and Technology); and two in downtrends (Energy, Financial)--clearly a mixed picture:

ENERGY: -200

We can see that the two commodity-related sectors, Materials and Energy, are underperforming the economically-sensitive Industrial and Technology areas. This may be a function of late week action, which saw a strong jobs report support the broad list of stocks, even as the U.S. dollar strengthened and commodities sold off.

This is a dynamic I'm watching most closely and will track via Twitter (follow here), along with updated trend data. Specifically, I'm sensitive to the possibility that we may be seeing an unwinding of the inverse relationship between share prices and the value of the U.S. dollar. With firmer evidence of economic strength supporting firmer Treasury yields--something we saw distinctly on Friday--we may return to a more normal regime in which economic strength supports both stocks and the U.S. currency.

If that were to occur, we would expect to see small caps regain performance from large caps (which had benefited from the weak dollar due to their international business) and commodity stocks underperform growth oriented issues. Both of those dynamics were in evidence late last week. If they continue, I would expect the Thanksgiving lows to hold and fresh bull highs ahead of us.