Sunday, November 08, 2009

Sector Update for November 8th

Last week's sector review noted deterioration in the Technical Strength of the sectors, but viewed the action as an interruption of a bull market rather than the start of a fresh bear. After weakness early this past week, stocks rallied into week's end, taking us back toward the bull highs. As we can see above, none of the sectors is showing a strong bullish trend as of Friday's close, but five of the eight are in bullish short-term trending mode, two are neutral, and one is bearish.

(Note that Technical Strength by sector varies from a very bullish +500 to a very bearish -500, with scores between -100 and +100 showing no significant directional tendency).

Here is how the sectors look as of Friday's close:


We can see that the consumer-related sectors made strong week-over-week gains in Technical Strength, as did Materials and Industrial shares. Financial stocks remain the relative strength laggards, participating poorly in the late week rally.

I am watching the 1064 area closely, as that represents prior resistance from the sessions at the end of October. We broke above that level in Friday's trade, and I'm looking to see validation of that breakout early this coming week. If we get that, particularly with solid upside breadth, a test of the bull highs should be in the cards.

The uneven nature of participation in the late week rally, however, leads me to question whether we will sustain that breakout. I am uncomfortable with the weakness among sectors that, thus far, have led the rally since March--including small caps and financial issues. I'm also concerned that, even after last week's bounce, we're still seeing more 20-day lows than highs among NYSE, NASDAQ, and ASE shares.

Failure to sustain the move above 1064 would lead me to look for a retest of last week's lows, but would also invite perceptions of a longer-term head-and-shoulders topping pattern dating back to the September momentum highs. This latter scenario would suggest a break below those lows from last week and is one reason I am defensive here.