Market Outlooks by Sector: Part 2

Last week we began to analyze the market rally on a sector-by-sector basis. My reasoning for doing this was to see if we were indeed in a new bull market. If we are, we should have seen that market breadth was increasing (meaning more sectors joining in the rally as it continued). If we are not, we would see that fewer and fewer sectors were participating in the rally as it went higher: implying that this is a bear market bounce.

So far, what we’ve found is that more than half the sectors we’ve analyzed have failed to make new highs in November. To recap, here are the sectors we’ve already looked at:
Today we’ll complete our sector-by-sector analysis. So let’s get started…

Biotech (PBE)
This is a familiar chart. Once again we see a peak in October followed by a failure to make new highs in November. Even worse, we’ve seen Biotech fall below its 50-day moving average (DMA) and then rise to “kiss” the line. This kind of action typically precedes a major collapse because it indicates that former support (where the market would bounce) has now become a line of resistance (where the market struggles to move higher). We’re going to see this sort of chart a lot today.

Biotech is a laggard.

Consumer Services (IYC)The upward momentum here remains strong. However, we have NOT seen a new high, but rather a potential double top. The main issue will be whether IYC remains above its 50-DMA or falls below it. Which ever occurs will dictate future action in the intermediate term. But unless we see a new high, I’d argue that this leader will soon become a laggard.

Construction (PKB)
Ouch. Construction actually peaked in September and has since staged a series of new lower highs and lower lows. This is one ugly chart. And I’d wager we’ll see a test of the 200-DMA (red line) in the near future. In a nutshell, the upward momentum is totally broken. This is extremely significant since construction (along with retail and financials) lead the market rally on the way up. Looks like it’s leading on the way down now.

Construction is a laggard.

Financials (IYF)Financials lead on the way up and now are leading on the way down. They peaked in October and have yet to make a new high. Worse, the 50-DMA has been broken and is now serving as upward resistance. In fact, we might even be forming a head and shoulders pattern that is leaning downwards. Any break below the neckline at 49 and change would likely forecast an extreme drop downwards.

Financials, once a leader, are now a big laggard.

Healthcare (IYH)The massive rally that kicked off in November came as a result of the healthcare bill currently in Congress. Still, you have to respect the upward momentum here (we’ve only seen one break below the 50-DMA since May). In the near-term, IYH is extremely overextended above its 50-DMA and needs to consolidate or correct if the current rally is to be sustained.

This is a definite leader and needs to be watched carefully: a reversal here would signal one of the strongest sectors in recent times rolled over which would indicate coming weakness for the market in general.

Industrials (IYJ)Definitely one of the stronger sectors. We’ve seen both a new high in November and multiple bounces off the same level of support (48) indicating strong upward momentum. It looks like we’re going to see a test of the 50-DMA in the coming days. A break below this (especially if it’s accompanied by a failure to break back above it) would bode ill for stocks in general seeing as IYJ along with healthcare is one of the few sectors to have participated in the November rally.

Industrials are leaders.

Materials (IYM)Virtually the exact same chart as the industrials. Interestingly, both sectors are closely linked with the real economy. And yet both are shooting higher to new highs despite weak economic data. This represents a serious disconnect from reality (the story of this entire market rally) and will likely result in a massive reversal at some point in the future as materials come back to earth. However, in the meantime the upward momentum here is strong.

Materials are a leader.

Real Estate (IYR)

No new high in November and a multi-month sideways trading range. This could either be a period of consolidation (to be followed by a new leg higher) OR the start of future weakness. It’s too early to tell, but the fact we DIDN’T see a new high in November leads me to believe we’re about to break below the 50-DMA and test support at 40.

IYR is a laggard.

Retail (PMR)

A prime candidate for continued weakness. No new high in November and the 50-DMA is now a point of strong resistance (PMR has tested and FAILED to break above it several times). This is not really a surprise considering the continued credit contraction for the US consumer. From a technical standpoint, it looks to me like we’ll be testing the 200-DMA shortly.

Retail is a laggard.

Telecom (IYZ)Wow, that’s quite a rally from the November lows. However, we’ve failed to make a new high and instead look to have posted a double top. Indeed, from a larger perspective it looks like we’ve been trading sideways in a massive trading range since September.

The issue now is whether this recent reversal breaks below the 50-DMA or simply bounces there. If we do get a break below the 50-DMA, the main support is at $17 and change. Any break below that and we’ve got a real collapse on our hands. However, for now, Telecom is a leader.

Transports (IYT)Double tops are fairly common… but triple tops? I don’t know but it looks like we’ve got one here. The bounce from key support at 65 was major. And the fact that IYT has yet to break below the 50-DMA again indicates that this is a sector that does not want to give up despite failing to make a new high in November.

I’d watch this one closely. If it breaks below the 50-DMA again, then it’s likely we’re going to see additional weakness. The fact that we haven’t seen a new high indicates upwards momentum is flagging.

Transports are a leader.

To recap:

That’s nine leaders and ten laggards. The leaders:

In a nutshell: drugs, planes, transports, phones, and stuff (materials). You’ll notice that most of these are the result of government stimulus or future windfalls (transports = Cash for Clunkers, Healthcare = Health Care bill, Defense = our massive military budget). Materials, meanwhile, is up due to the commodity rally (most of the companies in this sector are commodity or mining plays). And industrials are up as money shifts away from riskier small-cap plays into the bluechips.

The laggards:

In a nutshell: Tech, Real Estate, Retail and Banks. This is no surprise: anytime a bubble bursts, the biggest players in the bubble become the laggards, usually for a generation (you can see this in the fact that many tech players are still lagging from the Tech Crash).

The oddball here is oil services which should be way up given oil’s explosion from the March lows. Could this be telling us that Oil is up based on speculation and not real economic demand? That certainly was the case in 2008 when demand fell and supply increased and yet oil prices soared to $150 per barrel.

All in all, the market is split down the middle on a sector basis. This tells us that the current rally is likely a bear market bounce and not a new bull market. If it were a new bull market, the number of sectors hitting new highs should greatly outnumber the laggards: market breadth should increase as the general market rallies higher.

There are the makings of some great short opportunities here, particularly in the sectors that have broken below their 50-DMAs and then risen to “kiss” the line. But overall, I’d argue that the last two essays are compelling evidence that this is no new bull market. Furthermore, I’d argue that anyone investing on the long side today is exposing themselves to a lot of risk with minimal rewards: many of the leaders are putting in double tops which are typical “topping” patterns.

Comments

[SeekingTruth]

The charts plus the commentary provide a powerful combination, interesting too, Thanks.

The question relative the OIH Oil Service Holders is an interesting one and no doubt speculation plays an important part of the scenario relative to the crude element.
However, so does the intention of the Saudi Oil Minister who is determined to keep oil in the 75 to 80 dollar range at least for the near future, and until they decide on a new target price.
So far they have done a masterful job.
As long as the speculators know that they have this powerful ally, crude oil will be buoyed up unless we have another hammer blow to the economy, or the speculators get tired of storing it ,dollar gains strength, etc..
However , it does look like the service providers could suffer in spite of this and could possibly provide a decent short for those with the nerves and the time for due diligence/vigilance. Thanks for pointing this out.
Liked your article and comments a lot. Thanks again.

2009 Nov 30 04:36 PM

[realold]

Although I agree with some of your points, and I am definitely not a perma-bull, it seems to me that you are straining to make points based upon a pre-conceived opinion. Did you feel the market is a bear bounce before you looked at the data? It sure reads that way.

I sold out early in the plunge and then I have been about 35% invested during this run-up and have certainly paid an opportunity cost for being conservative. Everytime I sold and took nice profits, the stocks bounded upwards and left me in the dust. For me, bull or bear, I need some income and will continue to be partailly invested until it looks like interest rates will rise, especially in commodities. The country and dollar are an Obamanation. I don't see how we cannot have inflation when the rest of the world grows and we continue to decline. How about you?

2009 Dec 02 01:12 AM

[realold]

p.s.
Materials going up while the economy falters is not a disconnect. If the dollar plunges and the U.S. is economically done for, it does not mean that the rest of the world will not need materials. To me, it means just the opposite. Without the U.S. other nations will continue to become self-sufficient and prosper on their own, or fall apart - in which case everything will be pretty much worthless except food - a material?

2009 Dec 02 01:17 AM