Sunday, March 22, 2009

Sector Update for March 22nd

Last week's sector review concluded, "a good part of the recent rally has been short-covering among...beaten down sectors. We will need active, continued buying to move the sectors from neutral to solid uptrending status." We did, indeed, see a continuation of buying for much of the week, before selling hit the market at the important 800 level in the S&P 500 Index.

Here's how Technical Strength (a quantification of short-term trending) looks for the eight S&P 500 sectors that I track. Recall that sector-based Technical Strength varies from -500 (strong downtrend) to +500 (strong uptrend, with values from -100 to +100 representing no significant short-term trend:

MATERIALS: +180 (79%)
ENERGY: +40 (88%)
HEALTH CARE: +60 (30%)
FINANCIAL: +140 (63%)
TECHNOLOGY: +200 (83%)

What we see, surprisingly, is that the weakness late in the week took much of the starch out of the uptrend among the sectors. Most are trading in a neutral trending mode, with relative strength notable only in technology and materials shares. The latter reflects commodity strength on the back of dollar weakness due to the Fed's announcement of quantitative easing.

When we look at the percentage of stocks closing above their 20-day moving averages within each sector, as reported by Decision Point, we find that most sectors show more than half their components trading above that benchmark, with notably weak performance by health care shares. Interestingly, that defensive sector, which had performed relatively well in the market's downturn, is now underperforming its counterparts.

Note also how financial stocks have weakened since last week, given concerns over the toxic asset plan scheduled to be unveiled this coming week. That sector is key to the issue of economic recovery, and I will be following its response to leaked details of the plan early this week.

The 800 area poses significant resistance for the S&P 500 Index and this past week's action, as a whole, has done little to reassure us that the recent strong rally was anything more than a countertrend move in a downward market. What would we need to see to convince us that a more significant transition to bull mode is upon us? We'd want to see firmness among those financial shares and sectors sustaining positive Technical Strength and a majority of components trading above their 20-day moving averages.

Absent those indications, I'm viewing the current market as within a broad trading range defined by the 800-area highs and the recent bear market lows. Inability to surmount the top end of that range would initially target the range midpoint on an intermediate-term basis. I update the Technical Strength status of my basket of 40 stocks (five top-weighted issues from each from the eight sectors above) each morning prior to the market open via my Twitter posts (subscription is free). Those updates will help us gauge whether the rally will have legs or ultimately lead to further regression into the wide range.