Saturday, January 10, 2009

Sector Update for January 10th

Last week's sector review found evidence of a clear upside breakout among the eight S&P 500 sectors that I follow and the basket of 40 stocks drawn evenly from those sectors. A sharp reversal this week, however, has returned us below the former resistance area in the low 900s and back into the prior trading range. This reversal is reflected across the sectors, as measured by the Technical Strength measure that quantifies trending:

MATERIALS: -200 (52%)
INDUSTRIAL: -60 (68%)
ENERGY: -120 (68%)
HEALTH CARE: +120 (59%)
FINANCIAL: -360 (33%)
TECHNOLOGY: -100 (70%)

Financial stocks clearly lag the group, with commodity-related weakness taking a toll on materials and energy shares. Overall, the picture is no longer one of trending; for the most part, we've returned to a range bound mode. Following the day-to-day trend ratings for the basket of stocks posted before each market open via Twitter (free subscription) has been very helpful in catching the unfolding weakness.

When we look at the proportion of stocks in each sector trading above their 20-day moving averages as reported by Decision Point (in parentheses), we also see deterioration in momentum relative to last week. Once again, it is clear that financial stocks are the weakest sector, significantly underperforming the other groups.

Not reflected in the sector data is the fact that small cap stocks have gone from a position of leading large caps to one of lagging. Among S&P 500 stocks overall, 58% of issues are trading above their 20-day moving averages as of Friday's close. Only 41% of S&P 600 small caps, however, are trading above their benchmarks. What this suggests is that, while weakness has been concentrated in financial and commodity-related shares, it has also affected the broader market. This is not the kind of action one expects following a bullish upside breakout, and it will have me following the indicator data closely this coming week.