Sector Review December 11, 2010

• Posted by Greg Harmon
• on December 11th, 2010

Read the Textbooks, then Throw Them Away and Look for Yourself

Big brokerage houses all came out this week with upgrades to their GDP forecasts and raised their estimates for the peak value in the S&P 500 for 2011. Most of them base their analysis on an understanding of the business and economic cycle.

There are numerous fancy charts and displays to help explain these cycles and how to profit from it through understanding market sector rotation. Several of them are shown here. They are all great tools for understanding generally how the economy impacts the markets and vice versa. But rarely does the world work in such a predictable and smooth way. The transition from expansion to contraction and bull market to bear market can not be pinpointed that clearly.

If it did then we would all be invested in the right sectors at the right time all of the time and avoid the sectors and markets that are ready to fall. So what do you do? Avoid this macroeconomic review and look at the price action directly.  And what does that tell you? Yesterdays Macro Week in Review/Preview illustrated that equity markets are poised to go higher. Knowing that, now we can focus on which sectors show the best prospects. This week there are 5 distinct degrees of price strength shown in the market. These are the Strong Trend, Nascent Trend, Flattened, Recovering and Waning.

(As always you can see details of these individual charts and more on my twitter feed and on chartly.)

Strong Trend

There are two sectors displaying a continued strong rising trend. They are Energy Select Sector SPDR, XLE and Consumer Discretionary Select Sector SPDR, XLY
From the charts below it is easy to see the steady rise in price since this rally began in September. All of the Simple Moving Averages are rising as well, in parallel with the trend line.
Energy Select Sector SPDR, XLE

Consumer Discretionary Select Sector SPDR, XLY

These sectors having been leaders and will continue to perform, but may rest in the short run as other sectors catch up.

Nascent Trend

Close behind these sectors are the Materials Select Sector SPDR, XLB and Industrials Select Sector SPDR, XLI. Both of these sectors have paused recently but now look to be in a new trending phase higher as they break the previous highs. Below is a chart of the XLI for illustration.
Industrials Select Sector SPDR, XLI

Notice how it differs from the strong trend charts in that there was a long basing period that was retested several times and now a break to new highs. Watch for these sectors to try to catch up.

Flattened

The Technology Select Sector SPDR, XLK and Consumer Staples Select Sector SPDR, XLP are in this category. Notice from the chart of the XLP below that despite a recent rise, it has not yet made new highs and is broadly moving more sideways in a range than any other direction. This is easily seen in the flatness of the 20 day Simple Moving Average.
Consumer Staples Select Sector SPDR, XLP
The Relative Strength Index and Moving Average Convergence Divergence indicator are both showing strength so a move near term to catch the broad market is supported.

Recovering

The Financials Select Sector SPDR, XLF and Health Care Select Sector SPDR, XLV, are in recovery mode. This is good news. In the short term both had been in a down trend for the month of November and are now moving higher. But they both still have a long way to go until they can be viewed as being in a bullish uptrend.
Financials Select Sector SPDR, XLF

The XLF chart above shows this clearly. Although the move over the last 10 days has been straight up it is just breaking out of a consolidation channel that has lasted 16 months. The 20 day Simple Moving Averages are still flat despite that move. If the broad market continues to move higher these sectors are likely to continue to participate and make new highs.

Waning

The Utilities Select Sector SPDR, XLU is again in its own category. XLU has been in a broadening downward wedge, and has some work to escape it. This might be seen first as a sideways basing out of the wedge and then a move back above the 31.35 resistance.
Utilities Select Sector SPDR, XLU

The textbooks are great for understanding broad concepts, but the price action gives an up to the moment unbiased view of the market. I would be excited to see the Financial and Health Care sectors participate in a rally, broadening the move, not scared that it might signal a contracting economy. The world is an ever changing place and does not conform to textbook write ups. Look for yourself and use what you see.

Trade’m well.

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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