Sector Detector: Bulls Go Down Swinging, Refusing To Give Up Much Ground

Although the stock market displayed weakness last week as I suggested it would, bulls aren’t going down easily. In fact, they’re going down swinging, absorbing most of the blows delivered by hesitant bears. Despite holding up admirably when weakness was both expected and warranted, and although I still see higher highs ahead, I am still not convinced that we have seen the ultimate lows for this pullback. A number of signs point to more weakness ahead.

In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.

Market overview:

The Dow Jones Industrials, S&P 500, and NASDAQ all broke their string of five weekly gains, even though the bulls were reluctant to give up much ground. We are now halfway through the historically weak month of September, including the always worrisome 9/11 anniversary, and so far the bulls have shown little inclination to throw in the towel. Somewhat surprisingly given overall market weakness, traditionally-defensive sector Utilities was the weakest sector last week. Energy and Basic Materials were also weak, while Healthcare held up the best. With the yield on the 10-year U.S. Treasury closing Friday at 2.61%, we have seen some weakening in Treasuries, and thus in higher-yielding Utilities stocks, as well. Also, the U.S. REIT index fell 3%.

All eyes will be on Wednesday afternoon's FOMC policy statement and their current sentiment regarding interest rates. I still think there is greater downside potential in the 10-year yield, especially given global liquidity and the resulting demand for the safety of U.S. Treasuries. Moreover, ECB quant easing has led to a fall in the British pound and the euro. This has led to a notable strengthening in the U.S. dollar, which has helped keep inflation low, thus giving the Fed room to remain accommodative, which in turn is supportive of elevated valuation multiples in equities.

Nevertheless, although I expect the market to finish the year higher than it is now, there are plenty of reasons to be concerned about near-term market weakness. For example, according to the Stock Trader’s Almanac, the week following options triple-witching day (which is coming up this Friday), usually is a down week for the overall market -- and sometimes extremely weak (like in 2011 when the Dow Jones Industrials dropped over 700 points). Moreover, the technical picture has weakened, as described below.

The CBOE Market Volatility Index (VIX), a.k.a. fear gauge, closed Friday at 13.31, which is below the important 15 level but above its 50-day simple moving average, which has been providing some resistance, and it is now challenging resistance from its 200-day SMA.

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The author has no positions in stocks or ETFs mentioned. The materials available from us are published solely for informational purposes. They are not to be construed as advice or ...

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