Which sectors will be hot in 2011?

For the last few weeks, the stock market has shown signs of a “Changing of the Guard.”  We have seen some loss of momentum in the leading sectors since last August, with the market gradually evolving into a narrower leadership.  Also, as we have been discussing in our Market Comments, we have also seen deterioration in our Psychology Composite.  Quite often, instead of a significant correction to repair any potential damaging cracks in the “Wall of Worry,” the market itself will allow the previous HOT sectors or stocks to rest for a while, and some other sectors will start playing catch-up.  There appears to be some of that in today’s market.

The Industrial sector continues its long-term solid pattern of growth.

• For the first time since early in 2009, the Financials sector is showing signs of life. Fundamentally, this makes some sense as the very steep yield curve continues, and for the first time, some upturn in loan demand.

• Like Industrials, Basic Materials also seem to be hanging in there as emerging global economic growth continues its relentless upward grind.

• We have been citing Healthcare as an overly abused sector for the last few weeks, and our studies continue to see stabilization with hopes of some improvement. Healthcare is the best relative strength sector for the last two decades, so the weak relative strength of the last two years has to be continually observed for some signs of a sustainable upturn. Maybe a new Congress can lift the concern investors have had with Obamacare?

Energy has surged back from the British Petroleum Gulf disaster, but from a short-term view, it is now overbought and looking as if it needs a little rest to ponder what comes next.

Technology has not been “as hot” as Energy lately, but also seems to be cooling a little on the short-term.

Don Hays & Nicholas Warf

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