The market engine isn’t firing on all cylinders. Some sectors and industry groups are working hard and firing that spark to push the market pistons while others need to be replaced. This market update will clue you in on the sectors and industry groups that are pulling their own market weight.
There is no doubt that tomorrow's jobs data is going to be a major catalyst. The market is technically primed for a decent correction, or a breakout to new highs. If you’ve raised cash since the March/April correction began (March for some sectors), then tomorrow could encourage you to take new positions in the market if the numbers are good. If that’s the case, you’ll want to know what’s working, because the stock market has become much more selective as of late. Currently, only 50% of the S&P 500 stocks are above their 50-day moving average. That means half are working while the other are not over the intermediate-term. If the market has made you frustrated with this concept, then the answer is simple yet difficult to execute. We need to own the right stocks.
I can’t tell you what the right stocks are. I can’t even tell if the stock market will be up or down tomorrow. However, with technical analysis, we can predict that the current trend will continue until a catalyst changes the trend. Newton’s law of motion says that the velocity of a body remains constant unless the body is acted upon by an external force. In the same way, I can assume that Apple is going to continue to sell the best product out there until somebody else makes another one better. So far that hasn’t happened and that is why they continue to sell iPods, iPads, and iTVs (soon).
And so by technical analysis, we want to look for three important signs why we should own a stock, sector, industry group, or security.
- Is it trending?
- Is it breaking out of a base?
- Is it breaking long-term resistance?
These few sectors are achieving new decade-highs, breaking through the 2008 highs. From a performance perspective, they’re beating the S&P 500.
The consumer discretion stocks have been in an uptrend since the market bottomed in 2009. Credit was cutoff at the time and deleveraging was taking place, but that is no longer the case anymore. Bank lending and debt data from the Fed shows the consumer is spending and borrowing again. In the last month, the sector has been one of the few “growth” players to hit new highs while the market consolidates. A word of caution: many individual stocks within the sector look very extended and if the market corrected here, I think it would be one of the more vulnerable areas of the market. Technical conditions show that the sector is overbought. But if the trend continues, this area will likely see new highs because “it’s working”. Curiously…with the market concerned over the March jobs data, consumer stocks hit new highs on good retail sales figures.
One part Apple, the other part cloud, the technology sector is hitting new highs. I’m looking at a list of companies this earnings season that have beaten estimates while guiding forecasts higher for the rest of the year. A good third are all in the technology sector. Large-cap tech has been the big spot light. We may not be reaching the valuations yet of the tech bubble, but many are trading at valuations well above the last bull market’s highs.
Maybe two bear markets and the retiring of the baby boomers has something to do with it, but conservative, cash flow flush, and dividend generous consumer staples are doing well. They may not be beating the S&P 500 year-to-date, but the trend is clear. Many investors want to own blue-chip companies with less volatility than the market that pay strong dividends. It clearly shows in the chart of the consumer staples sector.
The health care sector is continuing to see fresh highs. Health insurance companies are charging higher premiums as costs go up. As prices go up, people are less inclined to go to the doctor if they can just “tough” out their cold. That means higher margins.
If these sectors have broken above the highs of the last bull market, does that mean they’re in a bull market? There can be no doubt. The two takeaways I want you to understand by reading this market observation is that these sectors have been in a bull market since their trend began in 2009. Each sector appears to have overbought momentum and will be vulnerable should the jobs data disappoint tomorrow. When the public starts cashing in poker chips, they don’t respect any stock or sector. If these sectors see a correction, it would be a good idea to pick up some names that are showing any of the three technical signs I talked about: trending, breaking out of a base, breaking long-term resistance. The few sectors that have not broken out above the 2008 highs are materials, energy, financials, and industrials. The hope for these sectors is in China for now. If China continues to show signs of economic stability and recovery, the materials, energy, and industrials will likely begin to outperform. Financials overall have recovered nicely from last year’s damage. Homebuilders and regional banks have been top performers, but we’ll need to continue seeing signs of stability economically. That’s why there’s a lot riding on tomorrow’s jobs data.