Dysfunction in US Sectors

As we have noted several times this year, our Psychology Composite moved to P4 on the last day of 2011.  However, with our Monetary and Valuation Composites still at their most positive rankings of M1 and V1, respectively, that was still very, very good.

January 2012 was one of the strongest performing months in history as a broad range of stocks rallied, and we saw 87% of all stocks in the S&P 500 and S&P 400 move above their 50-day moving average.  That was good...but it also brought out that overbought status that usually calls for either an overall market pause or a very dysfunctional rally from that point (see the chart below).  Then, on February 15th, our Psychology Composite moved to P5.  It has since returned to P4, but right on the border-line of that slightly weaker ranking.

Dysfunction?  Yes, with a capital "D."

Since the beginning of this month, only two S&P 500 sectors have prominantly outperformed the broad index - Energy (+3.2%) and Technology (+2.2%).  Then, we've seen Consumer Discretion (+0.5%) and Financials (+0.1%) have very slightly outperformed the S&P 500.  But that is only 4 out of the 10 sectors that are carrying the new high levels for the index.  Mr. Market is an artist at deception, and that is why our sector studies are so important.

In the chart below, you can see the updated levels and trends of those stocks in the S&P 500 and S&P 400 above their 50- and 200-day moving averages.  Be sure to notice that the 50DMA trend has moved lower since its high from a few weeks ago.

Click on the image above to view a larger chart.

Then, when you break these trends for the indices down to the sector level, you can see some interesting differences between the performance of large-cap sectors versus that of the mid-cap sectors. 

Click on the image above to view larger tables.

This week the stock market and the market of stocks or sectors is totally different.  As you observe the tables above, you can see that the large-cap (S&P 500) Energy sector is very strong, but the mid-cap (S&P 400) Energy sector is still very mediocre.  The same applies to the Materials stocks and sectors.  On the other side, however, you see the large-cap Healthcare sector close to the bottom of that comparison, while the mid-cap Healthcare sector is very, very strong.

So today, the advice we've been relaying in our broad market comments lately certainly applies - walk slow, pick your spots before establishing new positions, and wait on a good entry point close to support.

Don Hays

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