Sunday, February 22, 2009

Sector Update for February 22nd

Last week's sector review concluded, "Clearly we've weakened since last week and now are testing major support in the 800 area of the S&P 500 Index. We closed Friday with new 20-day highs across the NYSE, NASDAQ, and ASE at 492; new lows were 596. As long as we cannot sustain a plurality of new highs, I expect the market to breach that 800 level and test the bear market lows of November."

We did, indeed, sustain a plurality of new lows and have moved toward the November lows on strong selling pressure. As noted in my recent post, the over 4000 new 20-day lows observed on Friday was a level of weakness seen only 11 times since late 2002.

As we look at the Technical Strength of the eight S&P 500 sectors that I follow each week--a proprietary short-term measure of trending--we can see further evidence of this broad weakness:

MATERIALS: -440 (14%)
INDUSTRIAL: -440 (2%)
ENERGY: -440 (0%)
HEALTH CARE: -360 (31%)
FINANCIAL: -480 (1%)
TECHNOLOGY: -340 (11%)

Recall that the Technical Strength of each sector varies from -500 (very strong downtrend) to +500 (very strong uptrend), with values of -100 to +100 indicating no significant trend. As we can see, the sectors are mostly in a strongly downtrending mode, with only the defensive Consumer Staples group showing less weakness. In the recent past, such highly negative readings have represented oversold conditions that have led to short-term rallies.

When we look at the percentage of stocks in each sector closing above their 20-day moving averages (in parentheses), as noted by Decision Point, we find that all sectors show fewer than half of their components above that benchmark. Only the defensive Health Care sector shows a meaningful percentage of issues above their moving averages. The Energy sector has shown particular deterioration in the last week, and Financial issues are notably weak.

In sum, we continue to see broad market weakness, though a bounce from oversold conditions would not be surprising. It is not just the weakness, but the pattern of sector weakness--with relative strength in defensive sectors and relative weakness among economically-sensitive ones--that suggests that we have yet to turn the corner on the bear.