Market's Rally May Continue: Buy Only If Key Sectors Cooperate

Includes: IYE, IYF, IYH, IYW, SPY
by: Roger Nusbaum

Roger Nusbaum submits: Michael Kahn touched on an interesting point that comes up now and then. His column yesterday was about the financial sector lagging against the S&P 500. The basic idea is that the rally may be suspect or tiring if its biggest sector is lagging.

Here is the financial sector as measured by iShares Financial (NYSEARCA:IYF) against the S&P 500. The financials account for about 20% of the S&P 500:

IYF vs SPY 24 10 06

Here is tech as measured by iShares Tech (NYSEARCA:IYW), roughly 15% of the market, against the S&P 500. If there is a rolling over here it is certainly much more subtle than with financials.

IYW vs SPY 24 10 06

Here is iShares Health (NYSEARCA:IYH) which had a big lag which may or may not be retracing, you can decide for yourself. Health's weight is about 15%.

IYH vs SPY 24 10 06

The last one is iShares Energy (NYSEARCA:IYE) which is about 10% of the market. This ratio may have found a bottom too.

IYE vs SPY 24 10 06

The point of this post is that arguably the rally of the last few weeks has come without the support of some big sectors. This sort of action historically is a negative for the market as evidence of a tiring rally. It clearly does not have to play out negatively, and certainly there have been plenty of things this year that usually hinder markets but have seemingly had no effect.

The issue addressed here will either matter or it won't, but these sectors probably need to turn up relative to the market for the rally to continue.