Sector Update for September 7th

What a difference a week makes. The last sector update found the majority of sectors in modest uptrends, with evidence of sector rotation rather than strong upward trending. Over the past week, money has continued to flow out of stocks and most of our sectors have flipped from modest uptrends to modest downtrends. What this means in practice is that I'm viewing the market through two sets of lenses. One is the lens of the short-term trader, who is seeing the market weaken from day to day, week to week. (By Friday, for example, we posted over 2400 fresh 20-day lows among NYSE, NASDAQ, and ASE issues; a full indicator review will appear tomorrow AM and, as always, I will be updating the indicators prior to each trading day via Twitter). The other lens is at a longer time frame, which--so far--is showing potentially significant divergences between the current market action and the weakness that we saw at the July lows. In short, we're seeing more fear and selling than in the past few weeks, but fewer stocks are participating in that selling than at recent market lows.

So basically we have two scenarios: the first is that we've begun a fresh leg down in the market and will decisively take out the July lows across the major indexes. The second scenario--and, frankly, the one I'm leaning toward--is that the July through early September weakness is part of a bottoming process, with waning participation to the downside.

Here are the Technical Strength (trending) numbers for each of the eight S&P 500 sectors that I follow, with the percentage of stocks within each sector trading above their 50-day moving average (in parentheses):

MATERIALS: -80 (40%)
INDUSTRIAL: -200 (20%)
CONSUMER DISCRETIONARY: -100 (57%)
CONSUMER STAPLES: +40 (61%)
ENERGY: -460 (5%)
HEALTH CARE: -240 (30%)
FINANCIAL: +240 (64%)
TECHNOLOGY: -320 (19%)

We can see that the energy and technology shares are dramatic underperformers, as the market is pricing in the effects of slow/no growth in the economy. Consumer staples stocks are outperforming as defensive issues, but--interestingly--we're also seeing underperformance among health care shares. That may reflect renewed concerns about cost-cutting in that area in the wake of the Presidential election. Amazingly, financial shares are leading the pack; it will be interesting to see how they respond to the government bailout of FNM and FRE.

Note how the percentages of stocks above the 50-day moving averages is quite discrepant across sectors: once again, we're seeing plenty of sector rotation. At this point, the percentages are not near levels normally associated with intermediate-term market bottoms, despite the fact that we're at fresh annual lows in the NYSE Composite Index and near those lows in the S&P 500 Index. This is yet another reflection of the divergences I'm seeing in the current market. Either we have much further to go on the downside, or the majority of shares have put in their lows for the current bear cycle. I'll be tracking the indicators closely to handicap the odds of these very different scenarios; stay tuned...
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