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Sector Overview: For Better or For Worse

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Energy stocks are leading while staples look overbought.

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As the market move matures, I like to take a step back and look at the markets through an objective lens, analyzing the markets in spite of my bias and also utilizing my 6 telling sectors and the overall market.  So in the spirit of seeing both sides, here we go (click on links to view charts).

1) Large caps (SPY) - I have spoken at length about my trend rules and the main one being "When in a trend do not sell until the market gives you a close below the prior 2 days lows."  We have not had the market close below the prior 2 days lows this entire 13% move since the October 15 low.  There is a bit of a cause for concern as the market has extended over 8% above the 200 day moving average.  While 8% is stretched, it doesn't mean we are going to crash from here as there have been plenty times the market has extended much more than 8% above its 200 day moving average, even upwards of 15%.  Why do I bring up 8%?  It used to be a solid reversion method for me pre-2008, but the more I look at it in the post 2008 world, the more I wonder if this is a rule I must put aside as the markets have changed.  Large caps are definitely overbought via RSI over 70, but I wait until that comes back under 70 to make it a sell for me.  In short, we are in the momentum phase of this bullish run, so I simply have to defer to my momentum trend following rules as mentioned above.

2) Small caps (IWM)- Smalls show a bit of a different story. They have had consistent overhead resistance at just over 118 and even had a failed breakout back in July.  I do believe it is OK for small caps to underperform here as they likely didn't receive the major benefits of QE, as I have mentioned in my several WACC arguments on the buzz.  If small caps can get a close over 118, they may be the place to be for a catch up run. If they continue to stay below this resistance as Large caps get tired, IWM could start thinking about a double bottom of that Oct low.

3) Bonds (TLT) - This looks Uber bullish to me.  A rounding bottom in a context of above the major moving averages, means we may revisit highs very soon.

4) Banks (KBE) - Banks look to be struggling here with overhead resistance around 33.75ish.  They are always an area you would like to see leading and making new highs with the market.  This is a warning sign to me and shows that we should be cautious adding new longs here.

5) Retail (XRT) - Retail just continues to go momentum bullish - it broke new highs again last week and has momentum resistance around 92, with secondary support just under 90.  Still looks bullish to me, but could use a rest.  I would say this is late phase bullish.

6) Transports (XTN) - Transports are showing some signs of minor exhaustion, with a failed breakout on Friday, but they can use a bit more consolidation here above the major momentum resistance of around 101.5ish.  This appears to be trying to gear up for another bullish leg higher, but that is all void with a close below the resistance.

7) Energy (XLE) - By far the most bullish thing on my screen.  It is finally breaking above the downward sloping 50 day moving average, and if oil can find some footing the energy stocks should be able to rise substantially.  They have formed 3 consecutive higher lows and higher highs after a strong pivot, so that tells me we have bottomed.

8) Industrials (XLI) - Industrials broke out a again on Friday, providing the opportunity for another nice leg higher.  Once again they are overbought, but seeing this type of action is still encouraging for bulls.  I just can't bring myself to short any of these things above resistance like this.

9) Staples (XLP) - Staples have had a massive run, and I fully believe they have been the largest benefactor of my WACC argument, which allows for multiple expansion.  Now they are hitting massively overbought.  A rest is due here for sure, but the market never cares what I think.

So, in sum, it appears we are in the late phase of a bullish run, so it is very hard to add to longs here, but this move can extend a bit more.  This has been a truly historic run, so my best strategy is simply to stick with the trend until it tells you other wise.

Good luck!

Twitter: @twistedmarkets
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