The New Year Brings Strength to Markets, but Is It Real and Can It Last?
Along with the leaderboards, investors should take individual sector strength into consideration. This will provide insight into the depth and strength of market direction.
– Marshall McLuhan
Not more than five months ago, September 6, 2012 to be precise, the S&P 500 Index (INDEXSP:.INX) broke above the 1,425 resistance which has been in place since May of 2008. This level equated to the 'last' resistance prior to the all-time highs of ~1,550 set nearly 13 years ago (March 2000) – the beginning of my firm TAM's 100 Year Market Theory fourth secular channel. As the majority of sophisticated investors are aware, this high was solidified and confirmed nearly five years ago (November 2007). When evaluating last September's move/break, from a purely technical stance, the probabilities indicated a likely test of the prior 'all-time' highs. Yet, given the political uncertainty and fiscal cliff sensationalism, investor confidence was more driven to risk-off (or risk-neutral) rather than risk-on. This shift of mentality befell a very quick top of 1,475 not more than a week later and bested an 8.5% correction heading into the election. Yet, 2013 seems to have brought new vigor to the markets. But is it real, and can it last?
With the SPX up 3.2% thus far, and pushing the September top, there are many market technicians and fundamentalists alike awaiting confirmation of the potentially pending move. Again, if this is to be the case, technically speaking and in fear of sounding like a broken record, 1,550 is the next likely resistance point the market will have to contend with -- assuming 1,475 has truly been surpassed. All in all this would equate to another 5% from current levels. When assessing the risk inherent within the market (SPX), the most probable support remains at 1,400 (5% down).
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The reality of the fact all comes down to market breadth. Most evaluate this based on the number of companies reaching 52-week highs versus the number of companies reaching 52-week lows. This is a good technique, for the surface. But what if most of the new leaders are all within a few sectors or industry groups? Along with the leaderboards, investors should also take into consideration the individual sector strength. This will provide insight into the depth and strength of the underlying move. As of Friday, January 11, information technology makes up the majority share of the SPX weighting at 18.89%. This is followed by financials at 15.75%. Otherwise stated, 35% of the SPX move can be contributed to these two sectors; hence the importance of ascertaining their individual technical condition and stance.
After evaluating the top tier, midrange weighted groups are primarily where the rubber meets the road when it comes to 'bull' longevity. Industrials, health care, energy, consumer discretionary, and consumer staples all lie within the 10-12% weighted range and together make up an additional 55%. As for the remaining 10% it is mainly the non-cyclical sectors which typically do not drive nor lead the markets' strength (utilities, telecom services, and materials).
The simplest way to gain insight into longevity of strength is to continually stay technically-minded by evaluating the following ETFs:
- Financial Select Sector SPDR (NYSEARCA:XLF),
- Technology SPDR (NYSEARCA:XLK)
- Health Care SPDR (NYSEARCA:XLV)
- Consumer Discretionary SPDR (NYSEARCA:XLY)
- Consumer Staples Select Sector SPDR (NYSEARCA:XLP)
- Industrial Select Sector SPDR (NYSEARCA:XLI)
- SPDR S&P Oil & Gas Exploration & Production (NYSEARCA:XOP)
I hope this helps and finds you well.
Editor's Note: Read more at Tesseract Asset Management.
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