Wednesday, December 19, 2007

Technical Strength Update, Sector by Sector

As I've described before, my measure of Technical Strength is a quantification of trending behavior over a short-to-intermediate time frame. I track 40 stocks within eight S&P 500 sectors to get a sense for the technical strength of the large cap market as a whole and the individual sectors. Here's how we're looking as of Tuesday, 12/18:

Materials: -340
Industrials: -240
Consumer Discretionary: -140
Consumer Staples: -120
Energy: -140
Health Care: -80
Financials: -380
Technology: -100

Technical Strength Index: -1540 (3 stocks technically strong, 11 neutral, 26 weak).

We see financial issues once again bringing up the rear, suggesting that credit concerns have not abated. What we also see is that weakness has spread to all the sectors, something we haven't seen in quite a while. Even the formerly strong consumer staples sector, which has been acting as a haven due to recession concerns, has turned negative. Interestingly, one of the stronger sectors during 2007, the materials shares, has turned quite bearish, also perhaps reflecting anticipated reduced demand due to economic slowdown.

Another way of tracking sector strength and weakness is to take a look at the S&P 500 stocks within each sector and create daily advance-decline lines specific to those sectors. What we find is that the AD line is in a consistent downtrend for Consumer Discretionary and Financial issues, an uptrend for Consumer Staples and Energy shares, and range bound for the other sectors. Interestingly, Technology stocks are hovering near their AD lows for the past several months despite being a strong sector through much of 2007.

In sum, we see a very mixed picture, but one in which even the strongest sectors are seeing some downside pressure due to concerns over economic weakness. The last two days, we've seen 20-day lows across the NYSE, NASDAQ, and AMEX exceed 1700 and the Banking Index ($BKX) touch an intraday low for the year. Until we see some signs that measures from the Fed and Treasury are renewing confidence in the financial sector, I am not quick to be buying this market, particularly when we see sector performance deteriorating.


Sector Performance Turns Negative