The Signs of a Dysfunctional Stock Market

We've been talking about a dysfunctional stock market for almost all this year, and there is no way to see this more vividly than by looking at the chart below.  You can easily see that the stocks trading above their 50-day moving average (in the S&P 500 + S&P 400) have failed to reach a higher-high on any of the ensuing rallies since October/November of last year.  Despite the strong rally off of the recent June low, that lower-high personality still exists.

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As we've sat here and observed this trend of dysfunction, we've certainly seen the Financial Sector stocks continue to drag, but that is not all.  Healthcare had been terrible until last November, and whether it was due to the mid-term elections or not, the sector has very solidly started to improve since that juncture.  It has been our strongest sector over the last few months, even though it now seems to be cooling off slightly.  And of course, Technology has also had its troubles.  Since the bursting of that Tech bubble in 2000-2002, the Technology Sector has strained to keep its head above water.  It hit a trough about this time last year, and then ralllied nicely...again into that pivotal point in November of last year.  And since then, it has once again had its relative strength retrace its improvement back to that trough of last summer.

All of this has come with some obvious concerns about the "soft economic patch."  Most people concur this softness was exacerbated by the recent earthquake and tsunami in Japan and the resulting plant shutdowns in that part of the world that greatly restricted auto part supplies.  But it also presented an across the board sector shuffle, and for several months, this increase in anxiety and the related concerns have obviously benefitted the normally "defensive" sectors (i.e. Healthcare, Consumer Staples and Utilities).

We personally believe this current "concern" has been overdone, and we expect a return of the growth emphasis in the very near future.  However,  our "beliefs" are not what drive us, but instead, we listen to the message of the market, as provided by our Asset Allocation Model.

Click here to view today's complete Weekly Sector Report.

Don Hays, Nicholas Warf and Justin Wood

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