Wednesday, April 29, 2009

The Importance of Stock Sector Participation

Here's an afternoon snapshot of the ES market that I took, highlighting the Market Delta screen. At the time of the upside breakout, we had favorable NYSE TICK and expanded volume lifting offers. What I noted via Twitter, and we couldn't see from those indicators, was that several sectors were not making fresh highs, including NQ, XLI, XLY, and XLV. As we've seen in the past, when we have multiple sectors not participating in a market making new highs or lows, that move frequently reverses. That's what we saw in the afternoon (chart above), as the breakout bulls were trapped and had to cover their positions. That led to a nice trade back below VWAP (red line on chart).

As important as it is to follow one's own stocks or indexes closely, it's just as crucial to be aware of the context of market moves. Moves that are narrow in their participation are more suspect than those that lift or drop the sectors in unison. As my schedule with traders allows, I will highlight participation in my tweets (free subscription on my Twitter page), both by tracking sector performance and by reporting on the participation of the 40 stocks in my basket (highly weighted issues from each of the eight sectors I track). More to come...