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Sector Watch



Yesterday was a wonderful day for the market as the S&P 500 (SPX) rose again and is now up 20% from the low last October. You don't need me to tell you that is a dramatic move, especially given the news backdrop of a war, SARS and various other issues. To put the rally into perspective, I went back to find the last time the market was up more than 20% in just a couple months, and I think the results might surprise you. They say we Wall Street folks are Type A: Only as good as the last prediction or trade and with very short and selective memories. I frankly don't know what they (whoever they are) mean, but I do sort of remember a 20.9% rally in 2002 from Oct. 9 to Nov. 27.

That's right my fellow attention-deficit friends. We had a greater than 20% gain in the broadly followed S&P 500 just a few months ago. My point is that when the media picks up on numbers like "up 20%" and phrases like "the market is breaking out," my job is to put major market movements into perspective and to identify whether the gains (or at times losses) are sustainable. Typically, most get wrapped up in the emotion of being either very right or very wrong when a sizable move has taken place, and they tend to lose perspective of the potential upside from the level of where the market is versus where it was.

In order to do that, I want to take a look at the intermediate-term (weekly) charts of the SPX and the 10 sectors it is comprised of. The reason for doing this is that many sectors have or are about to break out of the upper end of the recent trading range.

I have said the upper end of the range for the S&P 500 is 945-955. It is important to remember that despite conventional wisdom, technical analysis is not just purely about one price and one point in time, which means different people use different prices. That is fine as long as you are consistent, which I try to be. When the SPX moved above 895-905 and the 14-period weekly stochastics had more room to run, it seemed logical to expect a move to the upper end of the range, where it would be likely that the market would get tired, run into resistance and reach extreme overbought readings. That appears to be the case now for the market and the sectors that comprise the SPX.

The charts below are meant to give perspective. Anything can happen very near-term while the "fear of missing" is running hot, especially after three years of losses. But it is important to put movements into perspective and identify sustainability. Hopefully, I have helped on that front.

I can sum it up by saying that after an 18% move in two months (from the 2003 low) -- and at such an intermediate-term overbought level - if you are buying the market as a whole and the leading sectors, please learn from the lessons of the past and have an exit strategy before you need one.

On the rotation front, I believe that the Consumer Staples and Health Care stocks have the best potential for catching the rotational move. Other than that, I will let the charts speak for themselves.

SPX levels suggest focusing on sector rotation

Consumer Discretion: The pause that refreshes.

Consumer Staples: Momentum ramping and just broke downtrend.

Energy: Consolidation should be the name of the game here as well

Financials: You know my view here based on overbought signal last week.

Health Care: The 2000 case suggests further upside potential

Industrials: This sector looks good but needs to rest

Info Tech: Looks good, but should pause at resistance

Materials: Nothing exciting here in middle of range

Telecomm: Still some momentum here

Utilities: This sector also acts well but is at a point where a pause is likely

Source on all charts: Baseline

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No positions in stocks mentioned.
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