Market vs. Sectors

When the broader stock market is consolidating, it is useful to look at sectors that are diverging from the market in order to evaluate underlying strengths or weaknesses in the market. Typically there is at least one pocket of the market that moves in advance in the direction of a subsequent move in the overall market. Last year at this time the market was consolidating near its move highs off of the Bear Stearns/March 2008 lows, and the big banks (KBE) were lagging badly. KBE was scraping along its 52-week lows at the same time as the NASDAQ was testing 5-month highs. Homebuilders (XHB) were also considerably weaker than the major market indices, and retailers (XLY) were fading fast as well. On the flip side, uptrends in coal, natural gas, and railroad stocks went largely undeterred, and they continued to rally during the market’s consolidation. However, the major indices then broke down in early-June, followed by a 6-week downtrend which ended in mid-July. Clearly, the upward momentum of the commodities-related sectors was no match for the weight of the financials and consumer-related sectors.

So where do we stand today in the current market consolidation? Although there are some sectors that are outperforming the major indices, such as semiconductors (SMH), oil services (OIH), solar stocks (TAN), and broker/dealers, the only sectors whose uptrends from the March lows have continued during the market’s May consolidation are consumer staples (XLP), steel (SLX), fertilizers, and gold miners (GDX). On the other side of the coin, despite underperformance in XHB, IYR, and IYT (especially the railroads), the only sector that is now in an active downtrend from the May highs is the regional banking index (KRE). Clearly, an evaluation of relative sector performance shows an underlying strength to the market that was absent before last year’s descent to new bear market lows. To clarify, rather, there is less weakness than last year. All the same, weakness in KRE is quite bearish, as it indicates that the market sees significant trouble for regional banks, which is part of the economic pandora’s box whose ghouls and demons are, apparently, still tormenting such areas as commercial real estate lending. Also, the sectors that right now are strongest are largely not associated with major upturns in the overall market.

It is also worth looking at the performance of several stocks that have a big influence on the overall market. AAPL, which, as of May 26, comprises a stunning 12.8% of the NASDAQ100, is perhaps the most influential stock in the US equity market today. The stock has rallied about 70% from its bear market low, made in January, and has just made an 8-month high with a noticeable daily RSI divergence from its previous high in early May. As one of the few true large-cap-growth opportunities available to all investors, particularly the big boys of the mutual fund and pension world, it makes sense that AAPL has rallied so fiercely the past few months. However, until that price/RSI divergence goes away, AAPL, and by extension QQQQ, will likely stall or outright sell off in the weeks ahead.

And how about XOM, the largest holding in the SPY? With the largest market cap in the US, and constituting 4.3% of the S&P500, it is always a good idea to keep tabs on how XOM is performing. Since mid-March XOM has been treading water, this despite 35%+ rally in oil and a huge rally in the stock market. The stock has not really diverged from the performance of the market since the May consolidation began, but the overall lack of interest from buyers in XOM this entire year has the stock significantly underperforming the overall market year-to-date. Although this dirty beast has not fallen nearly as much from its 2007/2008 highs as the broader indices, the stock remains in a now year-long downtrend that has shown no signs of a significant long-term bottom. This has bearish implications for the broader market.

In fact, it is difficult to find hardly any big, influential stocks that are outperforming the market. Between WMT, JPM, GS, IBM, HPQ, MSFT, CSCO, INTC, MMM, FDX, UPS, PG, and JNJ, the best performers since the early-May high in the market have been GS, PG and JNJ, and not one of them is above their May 7/8 high, which is when the S&P500 made its May high. GS has been the strongest of the lot, and its uptrend from early-March is still nicely intact, but it too is showing signs of slowing. Taken individually, the performance of each of these mega-caps is not uber-bearish for the overall market. However, it is unlikely that the market will rally without at least half of these stocks leading the way higher, and since the May consolidation began that has not been the case.

Stay tuned for an in depth analysis of the confluence of long-term and intermediate-term trends in the major indices.