What Story are the Sectors Trying to Tell us Today?

With the intense market volatility of the last five weeks, let's take a look at the sectors today to see if they give some economic wisdom ahead of the headlines.  In other words, how have the economically sensitive sectors such as Industrials, Basic Materials and Technology been acting over the past few weeks during this "market crash"?  We regularly monitor the actions in the sectors, and in order to help us get a long-term perspective as we try to analyze the personality of the sectors, we line the action of each sector's relative strength versus the action of the market, and it is interesting to see how the sectors often provide some early warning signs of trends.

For most of 2009 and 2010, Industrials had been given an over-weight status, but then during the Spring of this year (2011), the sector began to level off.  More specifically, we began to notice that Industrials started losing momentum in March of this year, as its trend of relative strength forced us to decrease our previous over-weight posture.  Furthermore, as the "market" made its most recent peak, we witnessed a lower-low for the relative strength of the sector.  This is not a death knell, but it was surprising.  Again, in hindsight, this was not supporting the strong economic rebound thesis, and currently, the sector remains very weak.  So, we'll stay very tuned into the evolution of this sector - hoping for an upturn.

The Basic Materials sector is somewhat distorted due to the inclusion of gold stocks and the huge fear-based rally in gold that started in 2000.  However, the strong rally in the relative strength of the sector that began around 2000 can also be attributed to the fact that most metal stocks participated fairly strongly.  Yet, the sector's relative strength has moved from an overbought status in October of 2010 to just under a market-weight status today.  This downtrend over the past several months was possibly the first indication of the weaker economic expansion than generally expected in October 2010.

If you love economically driven bull markets - as we do - then the relative strength action in the Technology sector is of key importance, since Technology is the epicenter of international economic trends.  While an upward trend started in this sector's relative strength back in July 2010, it turned into a downtrend in April of this year (2011) and continues its downward slope.

The stock market is a great barometer, and it encompasses the genius of every human being in the world, so ignoring trends such as these is done at your own peril.

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

Don Hays, Nicholas Warf and Justin Wood

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