Chart of the Week: Sector Winners and Losers

While there was a lot going on in the sector space during the rally from October to April and the pullback earlier in the month, I have yet to see any sort of detailed explanation of what happened during these two periods.

This week’s chart of the week below attempts to bridge this gap, with a four-chart comparison of the bull move from October 4, 2011 to April 2, 2012 as well as the bear pullback from April 2 to April 10, 2012. The top two charts cover the bull move, with the left chart capturing absolute sector performance and the right chart capturing sector performance relative to the changes in the S&P 500 index as a whole. The bottom two charts also have absolute sector performance on the left and relative sector performance on the right, but this time during the April 2-10 pullback.

The absolute data show that all sectors moved up during the bull move and fell during the bear move. The relative data allow for a more nuanced analysis that shows financials (XLF) were the main engine behind the bull move and also the largest contributor to the pullback. While financials shared some of the credit with consumer discretionary stocks (XLY), industrials (XLI) and technology (XLK) on the way up, it was materials (XLB), energy (XLE) and industrials that helped to pull the broader index down. Only two sectors have outperformed the S&P 500 index on the way up and on the way down: technology and consumer discretionary stocks. Conversely, energy has been the only laggard in both directions.

While not reflected in these charts, in the three weeks since the April 10^th bottom, consumer discretionary, materials and industrials have been the biggest contributors to bullish moves. Interestingly, technology has now flipped to being the biggest drag on performance.

One could make a fairly good case that the ability of the S&P 500 index to make a run at 1500 (take a bow, James Altucher) will in large part be a function of the degree to which technology returns to a leadership role.

Related posts:

• Chart of the Week: Looking for Sector Leadership
• Chart of the Week: A Month of New Sector Leadership
• Chart of the Week: Four Key Sectors Struggle
• Three Pivotal Sectors: Financials; Homebuilders; and Consumer Discretionary
• Sector Performance in the Last Two Bull Moves
• Market 2.0
• August Sector Recap
• Bullish Case Losing Traction
• The Energy and Materials Rally
• Financials and Real Estate Power Yesterday’s Rally
• What Fell and What’s Bouncing
• What’s Working? A Sector Overview

[source(s): StockCharts.com]

Disclosure(s): long XLY at time of writing

Chart of the Week: The Resurgent Consumer and Holiday Shopping

During the first half of 2010, a recovery in manufacturing helped to lift stocks. When manufacturing plateaued, stocks gave up their gains. Now it looks like manufacturing may be picking up again, but it has been consumer spending that has been responsible for much of the recent rise in equities.

There are two large ETFs devoted to retailers, XLY and XRT. While neither is a great proxy for the types of stores most likely to compete for our holiday shopping dollars, they will both pick up the major trends. I tend to have a slight preference for XRT over because XRT has more holding and these are more equally distributed. The top holding for XLY, for instance, is McDonalds (MCD).

In this week’s chart of the week below, I show the performance of XRT over the course of 2010. Note that earlier in the month XRT broke above its April high and has continued to maintain a bullish trajectory since then. Of particularly interest is the sector’s performance relative to the S&P 500 index (top study), which has been very strong since stocks began to rally in the beginning of September.

With the holiday shopping season off to a good start, XRT makes an intriguing momentum play and should be a barometer of the strength of U.S. consumer throughout the holiday season.

Related posts:

• Chart of the Week: Retail Sales Recovering
• Chart of the Week: Looking for Sector Leadership
• Chart of the Week: A Month of New Sector Leadership
• Chart of the Week: Four Key Sectors Struggle
• Three Pivotal Sectors: Financials; Homebuilders; and Consumer Discretionary
• Sector Performance in the Last Two Bull Moves
  

[source: StockCharts.com]

Disclosure(s): none

Chart of the Week: Looking for Sector Leadership

Stocks have rallied impressively since the beginning of July, but during that period, that has not been a particular sector which has led the rally. The lack of strong sector leadership can be seen on the one hand as a potential impediment to further bullish moves, but also as a sign of broad-based support for stocks and a potential inhibitor to a correction.

In the chart of the week below, I show the performance of the nine AMEX sector SPDRs since the market’s July 2^nd lows. Note that materials (XLB) and industrials (XLI) have been the top two performing sectors during the past 2 ½ months, reflecting the relative strength in manufacturing. The other two sectors that have outperformed the SPX during this period, consumer discretionary (XLY) and technology (XLK), both showed signs of coming to life last week.

Going forward, materials and industrials can conceivably continue to lead a bull leg, but the rally will benefit substantially if one or more of the others sectors rises to meet the challenge. For now at least, my money is on technology to step up. That being said, the consumer and financial sectors cannot afford to be a significant drag on stocks or the current rally will likely run out of steam.

Related posts:

• Chart of the Week: A Month of New Sector Leadership
• Chart of the Week: Four Key Sectors Struggle
• Three Pivotal Sectors: Financials; Homebuilders; and Consumer Discretionary
• Sector Performance in the Last Two Bull Moves

[source: StockCharts.com]

Disclosure(s): none

Chart of the Week: Retail Sales Recovering

With all eyes seemingly focused on Europe last week, it seems as if investors largely ignored the new economic data coming out of the United States.

I consider the most important of the new pieces of economic data to be the January retail sales report, which showed retail sales increasing 0.5% on a month-over-month basis (consensus estimate +0.3%) and 4.7% on a year-over-year basis.

The chart of the week below attempts to put the recent retail sales numbers into a meaningful historical context. Since the media generally only reports the month-over-month change from the Census Bureau press release, I thought I would add a couple of my own twists. First, the green area data series below captures the aggregate retail and food service sales in green going back to 1992. Note that until the beginning of 2009, there was never a sustained dip in retail sales. The red line overlays the year-over-year percentage change in retail sales. Given the relatively shallow historical dips, this number was never only negative twice prior to 2008: once in 2001; and a second time in 2002.

Starting in September 2008, the year-over-year change in retail sales was negative for 14 consecutive months. That streak was finally broken in November 2009, but when retail sales slipped during December, there were rumblings about the sustainability of the bounce in retail sales. January’s positive surprise has at least temporarily shelved some of those concerns and brought new buyers into the retail sector, where the two 800 lb. gorilla ETFs (XRT and XLY) have seen renewed interest.

The chart also annotates the 11.7% drop in retail sales from the October 2007 peak to the December 2008 cycle low. Since the low, retail sales have bounced 6.0% or 2.7% in real terms. It will likely be another year or two before retail sales return to their October 2007 highs, but to this point, the consumer has been much more resilient than many pundits had expected.

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: Four Key Economic Indicators
• Chart of the Week: Retail Sales
• Chart of the Week: Four Key Sectors Struggle
• XLY and XHB Move Above Their 200 Day Moving Averages

[source: Federal Reserve Bank of St. Louis]

Disclosures: none

Some Approaches to Trading ETFs

Two days ago in ETFs Increasingly Dominate Trading, I mentioned that this blog will devote more attention to ETFs in the coming year. I have also decided that after three years of dancing around the subject, I will also be a little more explicit in talking about different strategic approaches to trading as well as specific strategies.

Yesterday, while I was thinking about where these two new focal points intersect, I noticed a timely piece from CXO Advisory Group with the title of Simple Sector ETF Momentum Strategy Performance. The article, which looks at three different sector SPDR momentum strategies, ultimately concludes that “simple sector ETF momentum strategies have generally outperformed the broad stock market over the past decade for reasonably low trading frictions.” As someone who actively trades sector rotation strategies, I can’t say I was surprised by the results, but I thought the analysis and charts made for excellent reading – and are certainly worth a click through.

Speaking of sector and geography ETFs, I was also recently examining some of the work that TradingMarkets.com has done with ETFs in the context of their ETF PowerRatings. Anyone familiar with the work of Larry Connors will see how some similar themes from previous publications have been adapted to the ETF world. Based on some introductory materials and a review of charts such as the XLY chart below, it appears as if the ratings give the highest marks to ETFs that have shown intermediate-term trend strength, followed by a recent pullback. In other words, the ratings make it easy to get long up trends or short downtrends after a pullback makes for high probability entry signals. Frankly, this is the type of strategic approach that I have had a lot of success with and it appears that the ETF PowerRatings implementation is a similar application to some of my thinking about ETFs.

If the TradingMarkets approach appeals to the investor who is looking for someone else to do all the analysis and generate entry and exit signals, ETF Rewind is at the other end of the spectrum. In ETF Rewind Pro, Jeff Pietsch has built an Excel-based set of data and analytics that is ideal for the ideal for the investor who likes to do their own analysis and roll their own strategies, but needs a platform on which to make it all happen. Earlier this year, in Pairs Trading with ROB, I talked about some of the pairs trading applications that ETF Rewind can be used for. I failed to mention that ETF Rewind also comes with modules that generate both long and short weekly trend trading ideas, daily countertrend trading ideas and day trading candidates as well. Of course, most investors will also want to avail themselves of the almost encyclopedic collection of data for almost 200 ETFs and use the data and tools to develop their own strategies.

I should also note that I have a subscriber service which I rarely discuss here that utilizes a volatility-based ETF trading approach that I call EVALS (ETF Volatility Analysis Long/Short.) EVALS is unusual in that it is a trading approach which draws upon volatility-based indicators to trigger entries and exits. For more information, try VIX and More EVALS or check out the EVALS blog.

For more on related subjects, readers are encouraged to check out:

• ETFs Increasingly Dominate Trading
• Chart of the Week: Strategy-in-a-Box ETFs
• Pairs Trading with ROB

[graphic: ETF PowerRatings and TradingMarkets.com]

Disclosure: ETF Rewind and the VIX and More Subscriber Newsletter are available as part of a bundle (with Quantifiable Edges) in Blogger Triple Play

Chart of the Week: A Month of New Sector Leadership

During the course of the past month or two, stocks have drifted sideways, lacking buying conviction and strong leadership.

In this week’s chart of the week below, I have tracked the performance of the nine AMEX sector SPDRs over the course of the past month. Note that former leaders financials (XLF) and energy (XLE) are now lagging, while defensive sectors such as utilities (XLU) and health care (XLV) are leading the way. Now I have nothing against utilities and health care, but the next time these two sectors lead a significant bull rally will be the first time in my memory. One or more of technology (XLK), consumer discretionary (XLY), materials (XLB) or perhaps financials needs to take a leadership role to give the next bullish leg the type of strength that portfolio managers can believe in.

A good defense may win championship, but it will not light a fire under potential buyers.

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: Four Key Sectors Struggle
• Three Pivotal Sectors: Financials; Homebuilders; and Consumer Discretionary
• Sector Performance in the Last Two Bull Moves

[source: StockCharts]

Disclosure: none

Chart of the Week: Two Bull Legs and Counting…

In the seven months since stocks bottomed and rallied some 61% (in the SPX) to current levels, there have been two distinct bull legs. The first leg began with the low close on March 9^th (or intraday low on March 6^th) and lasted just a little more than three months until the high close on June 11^th. After a one month downturn, the second bull leg was launched on July 10^th and persisted almost two and one half months until September 23^rd. This time the pullback appears to have been more short-lived and has a provisional end date of October 2^nd.

The three charts below – which collectively form this week's chart of the week – capture the sector performance relative to the SPX (the numbers are not in absolute terms) for the first two bull legs and also throws in the first week of what may turn out to be a third bull leg.

Note that in the first two bull legs, financials (XLF) were easily the top performing sector in both instances. Also, on both occasions it was the materials (XLB) and industrial (XLI) sectors that had clear separation from the rest of the sectors and were almost neck and neck for second and third. These three sectors clearly represent a top tier in terms of performance during the most pronounced 2009 bull moves. A second tier of consumer discretionary (XLY), technology (XLK) and energy stocks (XLE) has generally performed slightly above the baseline SPX. The bottom tier consists of three defensive sectors that typically only outperform the SPX in market downturns. In fact, these three sectors, health care (XLV), consumer staples (XLP) and utilities (XLU), were the top three performers during the June 11^th to July 10^th pullback.

Just for fun, I have added the last week of performance in the bottom chart. It is too early to draw conclusions for one week of upward movement, but so far the leading sector for October is energy. If the markets are to continue to set new highs for 2009, a big question will be whether the same sectors continue to lead or whether new leadership emerges. Personally, I do not expect that the same performance hierarchy that has characterized the last two bull legs to continue during the next month or two of upward moves. In fact, I would expect leadership to shift to the second tier in the form of technology, energy or consumer discretionary stocks. No matter what happens, it will be interesting to see how the broader market performs if financials start to lag the other sectors.

[source: StockCharts]

XLY and XHB Move Above 200 Day Moving Averages

Two important ETFs, XLY (consumer discretionary) and XHB (homebuilders) have moved above their 200 day simple moving averages today for the first time since early October.

Among other important indices and ETFs that are closing in on their 200 day SMAs are the NASDAQ-100 index (NDX), semiconductor index (SOX) and emerging markets ETF (EEM).

If the current bullishness holds, we may see widespread moves above the 200 day SMA – and the possibility of renewed buying interest…or an opportunity to take profits.

I am cautious as the SPX approaches 875, but am not interested in a substantial short position until there is some sort of bearish momentum.

Where Is the Leadership in this Rally?

For the last three weeks, I have been impressed by the confidence and resolve shown by the bulls as they have consistently used pullbacks to flood the market with new long positions. Perhaps algorithms have no fear…

More recently, however, as the bull leg has stalled around the SPX 900 mark, I have found myself thinking about the lack of ‘proper’ leadership. Yesterday and today, the rallies have been led by commodities, with gold and energy equities the top performers.

At the same time, the three sectors I think are most critical to the recovery, my so-called ‘indicator species’ sectors (financials, homebuilders and consumer discretionary stocks), have been unable to get out of the red today.

I am not sure where the leadership will come from that will eventually push the SPX back over 1000. Today large cap technology names First Solar (FSLR), Apple (AAPL), Dell (DELL), Research in Motion (RIMM), eBay (EBAY) and Intel (INTC) are all strong performers. Frankly, I would expect technology to play a strong role in the next big leg up, but leadership may come from a number of other sectors.

There are few guarantees in the stock market, but I can guarantee that gold and energy are not going to pull the SPX up over the 1000 mark and leave financials (XLF), homebuilders (XHB), and consumer discretionary stocks (XLY) behind.

[source: StockCharts]

Breaking Down the Financial Sector Post-Lehman

For most of 2008, the three sectors I have been watching most closely to gauge the health of the economy are financials (XLF), homebuilders (XHB), and consumer discretionary stocks (XLY). I have even referred to these sectors as my ‘indicator species’ sectors, as I am of the opinion that unless all three of these sectors are healthy, the health of the broader economy cannot be assured.

In the past two weeks, relative strength all three of the above sectors has helped the broader market indices put in what is no less than a provisional bottom. Financials have been the most consistently strong sector, with the XLF financial ETF now 35% above its November 21^st low.

In the chart below, I have attempted to break out the relative performance of various financial sectors over the past three months, using four ETF from the financial sector specialist Keefe, Bruyette & Woods (KBW). The chart dates back to September 5^th, ten days before the Lehman Brothers bankruptcy. The baseline ETF (black line) is KBE, which tracks the KBW bank index. The top performer among the other three ETFs is KRE, the KBW regional banking index. The two laggards are KIE (KBW insurance index) and bottom-dweller KCE (KBW capital markets index.)

In relative terms, insurance and capital markets seem to have enjoyed the more impressive bounce off of the November low. Regional banks, which actually showed small gains in September, have been acting more sluggish as of late. More dominoes are certain to topple as the ripple of the financial crisis continues to broaden its reach, but the recent relative strength in insurers and investment banks bodes well for the financial sector, which just might provide leadership when the next bull leg commences.

[source: BigCharts]

The Big Four U.S. Banks

The events of 2008 have completely reshaped the landscape of the U.S. commercial banking industry. At this point it looks as if four major banks will emerge as the dominant players: two relatively strong ones; and two that face a more challenging competitive environment. Here the charts identify the players nicely. From the peak of October 2007, Wells Fargo (WFC) and JPMorgan Chase (JPM) have each fallen about 20%, less than one half of the drop in the financial sector ETF, XLF. At the other end of the spectrum are Bank of America (BAC) and Citigroup (C), each of which has seen their stock drop at least 65% during this period. See the top chart for details. Refocus to the period since the failure of Bear Stearns (bottom chart) and the pattern is even more dramatic, with WFC and JPM each down a little more than 5% while BAC and C are down over 35%.

XLF made a new low of 11.70 on Thursday and is trading at about 12.00 as I type this. If XLF and the large commercial banks are not able to scrape out a bottom, then this market will not be able to sustain any rally. Better yet, add XHB (homebuilders) and XLY (consumer discretionary sector) to that list. A sustainable rally will require the participation of XLF, XHB, and XLY.

[source: StockCharts]

August Sector Recap

August was a month in which the S&P 500 largely drifted sideways, but there was a good deal going on in the various sectors that make up the index. The graphic below shows sector performance for the nine sector SPDRs for the first eight months of 2008 (bottom) and for the month August (top).

On the plus side, the turnaround in the consumer discretionary sector (XLY) is clearly responsible for much of the recent positive momentum in the SPX. Also worth noting is that four other sectors outperformed the index in August: consumer staples (XLP), health care (XLV), industrials (XLI), and technology (XLK).

As has often been the case during the past few months, when the SPX has been moving up, energy (XLE) and materials (XLB) have been moving in the opposite direction. In August, the financial sector (XLF) was also pulling the index in the wrong direction.

Watch the consumer for more clues about sector leadership and overall market strength in the month of September.

[source: StockCharts]

Bullish Case Losing Traction

As this week is somewhat of a vacation for me, I had a rare day where I missed about 95% of the trading action and am only now checking the patient’s vital signs. On a down day like today, I expect to see some more bullish bias creep into some of my contrarian sentiment indicators; much to my surprise, today things actually look worse for the bulls in that regard.

Now that it has been more than two months since I posted the chart below, I thought this evening might be a good time to update the three sectors I have been watching most closely since the March bottom. These 'indicator species' sectors are the financials (XLF), homebuilders (XHB), and consumer discretionary (XLY) stocks. As the chart shows, the financials and homebuilders recently moved above their 50 day simple moving average, only to fall sharply below that important technical level over the course of the past three days.

Until the XLF, XHB, and XLY can all close above their 50 day simple moving averages, I am likely to be skeptical of anything that has the appearance of a rally.

Sector Performance in the Last Two Bull Moves

I have been fielding a bunch of questions about sectors, particularly oil and energy, over the past few days. Included in most of my responses has been a comparison of the March to May bull move and the most recent move that came off of the July 15^th bottom. Since I rarely repost content from my subscriber newsletter, I thought it might be a good excuse to cut and a paste a section from Wednesday’s newsletter on sectors:

Let me reflect on the nature of the March to May rally from SPX 1256 to SPX 1440, a gain of 184 points. As shown in the sector breakdown (top graph), there was strong sector participation across the board. Interestingly enough, energy was the top performing sector, followed by technology and materials. Financials fell in the middle of the pack.

Fast forward to the past six trading days and we have the SPX now 82 points above the low. This is not quite half the move of the March to May rally, but an impressive showing for a little more than one week of work. Note how the sector breakdown looks quite different in the current rally (middle graph). The extent to which financials have powered the recent move is impressive, if a little lopsided. Note that only financials are the only sector to have made larger percentage gains in the current rally than in the March to May move. In fact, besides financials, only the industrial and consumer discretionary sectors have made at least half of the gains from the earlier rally in the more recent rally. All the other sectors have made gains of 3% or less, with energy and utilities showing losses.

The bottom chart uses the same data as the middle chart, except that percentage gains and losses are net of the performance of the S&P 500 index. This confirms that the financials are the only sector really responsible for moving the SPX. The consumer discretionary sector has provided a small lift and the industrials are just narrowly beating the SPX, but without participation from financials, this rally would have a much different look and feel.

Getting Tougher to Push Financials Lower from Here?

Halfway through today’s session, my screen is once again filled with red, as the indices look as if they are poised to take a run at yesterday’s lows.

From a sector perspective, the picture is considerably muddier, as two recent laggards, financials (XLF) and consumer discretionary (XLY), are clinging to positive territory as I type this. As I see it, one or the other of these sectors will have to continue to deteriorate if the markets are going to continue lower from current levels.

Given that the financials are already down 53% from their May 2007 highs (see chart below), it is important to keep in mind that the easy money has already been made on the short side. A wide variety of financial sub-sectors (mortgage companies, bond insurers, money center banks, regional banks, investment banks/brokers, etc.) have already made multiple trips to the woodshed – and while some individual issues may still be quite vulnerable going forward, there is a limit to the amount of blood that can be squeezed from a broad-based ETF or index.

Going forward, I suspect the risk/return profile of the financial sector may actually favor the bulls. If the next couple of broad market moves down fail to pull the financials with them, the path of least resistance for the likes of XLF may indeed be up. Keep an eye on this development, because if (and admittedly this is a very large “if”) the financials are done falling, then the markets are likely to be ready to put in a bottom too.

The VIX and Sectors: A One Day Snapshot

I collect a lot of strange and unusual data in the course of trying to be “Your One Stop VIX-Centric View of the Universe…” and it makes sense to share some of those chunks of data from time to time, even when I don’t think it will change the way anyone looks at the market.

Now that I’ve lowered your expectations, I call your attention to the graphic below, which captures the movements in the various sector SPDRs over the course of Monday to Tuesday, a day in which rumors of persistent difficulties at Lehman Brothers (LEH) helped to drag down the financial sector ETF (XLF) to its lowest level since March. The sectors are ordered with the highest weighted ETF at the top (XLK - technology) and the lowest weighted (XLU - utilities) at the bottom. With any luck, the balance of the graphic is self-explanatory.

From a sector and volatility perspective, I found a few interesting tidbits from the graphic. First of all, the change in the VIX and the change in the SPX implied volatility were almost identical, which is what you would expect. I did find it interesting that the VIX jumped more than twice the percentage change in the mean IV across the nine sector ETFs. Drilling down a little more, only three of the sectors had an increase in IV that was higher than the jump in the VIX -- and in each instance this was just barely the case.

I have highlighted in green the two sectors in which the price of the ETF increased at the same time that implied volatility increased. For the consumer discretionary sector (XLY), the change is not particularly dramatic, but for the materials sector (XLB), there is a substantial jump in IV on the heels of increasing price. Needless to say, this is unusual.

Part of the explanation for the large increase in the VIX (and SPX IV) relative to the individual sectors may come from the fact that the four most heavily weighted sector ETFs all had a substantial rise in IV, but even when taking this into consideration, the change in the VIX exceeds the change in the sum of the weighted parts.

Finally, for anyone who followed my fearogram and SPX-VIX correlation analysis last year, you may recall that the median daily percentage move in the VIX is -4.2x of the daily move in the SPX. For the record, yesterday the VIX moved 3.6x in the opposite direction of the SPX. In percentage terms, this is a fairly typical negative daily correlation number. [Disclosure: Long LEH at time of writing.]

Three Pivotal Sectors: Financials; Homebuilders; and Consumer Discretionary

Throughout the recent market turmoil, there have been three sectors that I have watched most closely in order to help determine the extent of the challenges the US economy is currently facing and will face in the near future. There should be no surprises here, but for the record, those sectors are financials (XLF), homebuilders (XHB), and consumer discretionary (XLY).

The financials are the foundation of these three sectors and provide a sense of the strength of the institutions involved in credit markets and other related financial businesses. The homebuilders offer some insight into changes in value of existing real estate assets, as well as consumer confidence and willingness to undertake large financial commitments in the coming months. Finally, consumer discretionary firms reflect the size of the pool of disposable income and the level of comfort consumers have in letting go of or holding on to that money.

The chart below shows all three sectors over the past six months. Financials and homebuilders are clearly struggling and have both fallen below their 50 day simple moving averages as of late. The consumer discretionary sector has been the strongest of the three over the past month, but may have peaked last week after getting extended.

Ultimately, my belief is that a healthy economy and a healthy stock market require a strong performance in all three of these pivotal sectors, which is why I call them my 'indicator species' sectors. That may still happen down the road, but at the moment, at least two of the three pivotal sectors are showing a fair amount of weakness.

Limited Upside for Consumer Discretionary Sector?

As Corey at Afraid to Trade pointed out in Some Surprising Trend Day Action, one of the more interesting sub-plots in yesterday’s breakout was the strength in the consumer discretionary sector, which rallied 5.8%.

I am firmly of the opinion that the current stock market rally cannot be sustained unless consumer confidence, consumer purchasing power and consumer activity all rally in concert with the markets.

My concern with the consumer discretionary sector extends to a chart of the sector ETF, XLY. In the weekly chart below, the current level of the XLY (33.55 as I type this) is now back to the 32-34 area bounded by the symmetrical triangle formation of 2005-2006 and is also rapidly approaching the 34.08 50% Fibonacci retracement level. Both of these indicators suggest that the XLY should find considerable resistance in the 34-35 area; if this is the case, the market will have to rely on other sectors to continue the current bull rally.

Financials Struggle to Establish Momentum

Further to my recent comments in The Energy and Materials Rally, I thought it might be interesting to show the relative performance of the financial sector (XLF) versus the SPX. The chart below shows that while the financials helped to drag down the SPX over the past six months or so, it also reveals that any gains that the SPX has been able to make over the past 2-3 weeks have been without the participation of the financial sector.

I am of the opinion that while the technology (XLK) and industrial (XLI) sectors can provide leadership in any bull move up from current levels, such a move will be severely hampered and likely short-lived without the participation of the financial (XLF) and consumer discretionary (XLY) stocks.

The Energy and Materials Rally

While Google (GOOG), Caterpillar (CAT), and other big technology and industrial names have recently helped push stocks to their best levels in three months, the rally off of the March 20^th bottom may not have the kind of sector composition behind it that is conducive to an extended move. In fact, so far the bull run has been largely the result of strong performance in the energy and materials sector – a good portion of which can be attributed to the search for a hedge against inflation.

The chart below shows the performance of the nine AMEX Select Sector SPDRs relative to the S&P 500 index since the March 20^th bottom. The sectors normally associated with an economic turnaround – technology (XLK), industrials (XLI), and consumer discretionary (XLY) – have heretofore not been leading the charge. On the other hand, the leading sectors over the past month – energy (XLE) and materials (XLB) – are not the sectors that typically are able to lead a sustainable rally. In the next week or two, look for other sectors to start outperforming the energy and materials group. If this fails to happen, there will probably not be sufficient market breadth to keep the current rally alive.