Friday, December 15, 2006

Sector Rotation or Breakout Rally: Perspective From The ETFs

Here we see how the different "Spyder" sector ETFs have performed since August. Those that have outperformed the S&P 500 Index (SPY) are coded green; those that have underperformed are in red.

Now here's the interesting thing: Of the seven sectors that have outperformed the S&P500 Index, only one made a new closing high on Thursday. That was XLY, the Consumer Discretionary ETF. The other six sectors that have been strong since August did not make new highs on Thursday.

Conversely, five of the ten sector ETFs that have underperformed the S&P 500 Index closed at new highs on Thursday. My take? The rally Thursday and this AM represent sector rotation and not "the rising tide that lifts all boats". I'm watching carefully to see if this rally broadens out or stalls out. One way of doing that is tracking the ETFs and seeing how many can remain above their Thursday highs. So far, a majority are struggling to ride the tide.

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