Market Is More Selective, Moving Averages Key

by: Financial Sense

By Thomas J. Smith

It has been a bumpy ride to get to relatively flat on the market. Below the surface there has been a lot of activity to get the markets where they were at the beginning of the year. Correlation has dropped significantly. Stock picking will be rewarded more this year. The difference between the best and worst sectors has been striking. Healthcare has been the strongest area of the market so far and telecom has been the worst. The difference in relative performance for the two sectors has been 12.3% year-to-date.

The commodity complex has begun to reverse its downtrend. On a broader basis, commodities topped out in late 2012 and just recently reversed that long downtrend. Gold bottomed out just below $1,200 and has been advancing nicely here. Whenever people ask me when something, stock or sector, is attractive I tell them it needs time and price. Many commodities have been going down for quite some time so the price component has been met. But, until recently, the price action has been weak. That has not been the case as of late.

Energy has been volatile for the past few months. There was a pretty sharp pullback recently but the energy space has improved substantially over the past few weeks. My focus in energy is domestic drilling activity. There is more drilling in the U. S. than anyone could have anticipated several years ago. Companies that service all of these wells look attractive to me.

The number of stocks that act well from a technical perspective has been decreasing over the past several weeks. When the pullback ended in early February many strong names tested support for the first time in several months. The advance-decline statistics since the market bottomed out have been very strong. In order for the technical outlook for the market to remain strong I need to see more stocks move back above the all important moving averages. As we entered this week there was an extremely large number of names in the market that were very close to regaining their technical footing. Many were just below critical 50 or 100 day moving average levels. I will closely monitor that situation over the coming weeks. The market is clearly more selective and more names have entered into their own private downturns as the broad based averages move higher.

The unweighted market averages remain in strong shape technically and hit new highs last week. The NYSE A-D lines hit new highs last week as well. That makes sense as the market has advanced. Again, what I need to see in this advance now is more names moving above moving averages in order to be more bullish.

There has been a rotation into energy in the last few weeks. The airline and housing groups also remain strong. Rotation is always needed to keep the broad market averages moving higher.

Some potential negative divergences developed yesterday. The averages moved over resistance levels and failed to hold into the close. Resistance levels for the S&P 500/Dow/NASDAQ/Russell 2000 are: 1852/16,590/4286/1183. Support levels for the respective averages are: 1809/16,000/4224/1141.