The Lows Still Appear To Be In... What's Next?

| About: SPDR S&P (SPY)

Summary

Cautionary Note.

The Bullish Case.

Changes in Sector leadership.

Hopefully, "the third time is a charm", as markets are attempting to remain above the August and September 2015 and January 20th, 2016 lows.

Cautionary Note:

Failing to remain above 15,666 in the Dow and ~1812, in the S&P 500 (NYSEARCA:SPY) would suggest that market conditions may continue to remain unfavorable for the near term and foreseeable future.

Bullish Case:

Similar to other market bottoms, most of the conditions have been met for a "Lower Risk Entry Point". Those conditions include a high volume and high volatility decline in the market, followed by a strong reversal in market direction. If the previous market lows hold up and a reversal is identified, the markets then need to follow-through, by continuing to move positive for 2 to 3 days. These conditions have been met in conjunction with lower market risk readings.

One caveat, in the commentary titled The Lows Appear To Be In… What's Next?, it was pointed out that the S&P 500's relative strength moved out of favor against bonds and cash:

"First of all, the S&P 500 turned negative against both bonds and cash. This is normally not a good indication but, given the rapid selloff coupled with the 01/20/2016 reversal, the shorter term readings are very positive and this will be closely monitored going forward."

As promised, this has been watched very closely and in order for the market to move back in to favor, in terms of relative strength versus a risk free cash holding, the S&P 500 needs to move above 2060. It's that simple.

Sector leadership

Dow Jones Transportation Average (NYSEARCA:IYT) turned positive on 2/12/2016

Energy Sector (NYSEARCA:XLE) turned positive on 1/29/2016

Financials (NYSEARCA:XLF) moved out of favor as of 1/29/2016.

Leading Sectors as of 2/17/2016

Dow Jones Transportation average: The Dow Jones Transportation has recently turned positive on relative strength. A partial list of equities in the transportation sector include, United Parcel Service, Inc. (NYSE:UPS), Swift Transportation Company (NYSE:SWFT), and Union Pacific Corporation (NYSE:UNP), Latam Airlines Group S.A. (NYSE:LFL)

Energy: The Energy sector and partial list of energy sector components include, NRG Energy, Inc. (NYSE:NRG), Schlumberger Limited (NYSE:SLB), Exxon Mobil Corporation (NYSE:XOM), Halliburton Company (NYSE:HAL), Concho Resources, Inc. (NYSE:CXO) are trading positively when compared to the S&P 500 index.

Industrials: The Industrial Sector (NYSEARCA:XLI) and some of the leading components include, General Electric Company (NYSE:GE), 3M Company (NYSE:MMM), Honeywell International Inc. (NYSE:HON), Lockheed Martin Corporation (NYSE:LMT) are continuing to trade positively.

Consumer Discretionary: The Consumer Discretionary Sector (NYSEARCA:XLY) and a partial list of consumer discretionary components include, Scripps Networks Interactive, Inc. (NYSE:SNI), The Home Depot, Inc. (NYSE:HD), Time Warner Inc. (NYSE:TWX), Comcast Corporation (NASDAQ:CMCSA), McDonald's Corp. (NYSE:MCD), Starbucks Corporation (NASDAQ:SBUX), NIKE, Inc. (NYSE:NKE) are continuing to move positively on relative strength.

Consumer Staples: The Consumer Staples Sector (NYSEARCA:XLP) and a few selected components have been pretty solid. The following ideas are showing leadership within the sector: The Procter & Gamble Company (NYSE:PG), The Coca-Cola Company (NYSE:KO), Altria Group Inc. (NYSE:MO), Wal-Mart Stores Inc. (NYSE:WMT), Cencosud S.A. (NYSE:CNCO)

Technology: The Technology Sector (NYSEARCA:XLK) is still in favor and a partial list of technology components include, Apple Inc. (NASDAQ:AAPL) Agilent Technologies Inc. (NYSE:A), Alphabet Inc. (NASDAQ:GOOG), SanDisk Corp. (SNDK), Microsoft Corporation (NASDAQ:MSFT), and Facebook, Inc. (NASDAQ:FB)

Utilities: The Utilities Sector (NYSEARCA:XLU) continues to be in favored status and Duke Energy Corporation (NYSE:DUK), American Electric Power Co., Inc. (NYSE:AEP), Southern Company (NYSE:SO), Dominion Resources, Inc. (NYSE:D), PG&E Corporation (NYSE:PCG), Public Service Enterprise Group Inc. (NYSE:PEG), are some of the utility sector components.

Transitioning sectors:

Basic Materials: The Materials Sector (NYSEARCA:XLB) has been showing signs of near term strength and is close to transitioning into favored status. Some basic material components include: Monsanto Company (NYSE:MON), The Sherwin-Williams Company (NYSE:SHW), E. I. du Pont de Nemours and Company (NYSE:DD), Alcoa Inc. (NYSE:AA), AK Steel Holding Corporation (NYSE:AKS), and United States Steel Corp. (NYSE:X)

Out of Favor Sectors.

Financials: The Financial Sector is out of favor based on relative strength. Despite being in a sector that's out of favor, financial sector components that are moving positively include, The Allstate Corporation (NYSE:ALL), Banco de Chile (NYSE:BCH), Brown & Brown Inc. (NYSE:BRO), CME Group Inc. (NASDAQ:CME), Nasdaq, Inc. (NASDAQ:NDAQ), Oaktree Capital Group, LLC (NYSE:OAK), Federal National Mortgage Association (FNMAS) and (OTCQB:FNMA)

Healthcare: The Health Care Select Sector SPDR ETF (NYSEARCA:XLV) is out of favor but, the healthcare sector has some components that are moving positively on relative strength, Bristol-Myers Squibb Company (NYSE:BMY), Mylan N.V. (NASDAQ:MYL), Johnson & Johnson (NYSE:JNJ), ResMed Inc. (NYSE:RMD), and Stryker Corporation (NYSE:SYK)

The MSCI EAFE (NYSEARCA:EFA) is currently out of favor. One area that is showing relative strength is Chile (NYSEARCA:ECH) or (NYSEMKT:CH)

Other Ideas:

The equally weighted S&P 500 (NYSEARCA:RSP) is a different approach to owning the S&P 500 index. Rather than own an index where the largest market capitalization stocks have the most effect on the index, the equally weighted S&P 500 holds an equal amount of each component of the S&P 500 index. The equally weighted S&P 500 is also positive against the S&P 500.

Conclusion:

The lows still appear to be in based on multiple measures, including low readings on the proprietary market risk meter and commonly seen market activity during previous market corrections. The one caveat is the S&P 500 needs further gains above 2060 to bring it back in favor when compared to a risk free cash position.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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