SECTOR CHARTS DON'T HAVE TO LOOK ALIKE -- USING WEEKLY AND MONTHLY MACD SIGNALS -- NYSE ADVANCE DECLINE LINE BREAKS OUT BUT DOESN'T RULE OUT RIGHT SHOULDER PULLBACK -- WHATEVER YOU DO, DO IT SLOWLY

SECTORS CHARTS DON'T HAVE TO LOOK ALIKE... One of our readers asked if the sectors that make up the S&P 500 need to be forming the same price pattern. The answer is no they don't. Some sectors usually rise faster than the S&P and some rise slower. Chart 1, for example, shows three sector SPDRS that have been rising faster than the S&P 500 since last November when, I believe, a "head and shoulders" bottom in the S&P 500 may have begun. The three leading SPDRs are technology (blue line), basic materials (black line), and consumer discretionary (red line). All three have already exceeded their January high. That's a good sign for the market because these are groups that are usually the strongest at market bottoms. Chart 2 shows three sector SPDRS that have underperformed the S&P and remain well below their January highs. They are utilities (black line), healthcare (blue line), and consumer staples (red line). Those are defensive groups that usually lag at market bottoms. The fact that they are lagging shows that investors are becoming more optimistic. When we look at the overall market, however, we have to include all sectors. When we do that, we get the S&P 500. That's why we use that benchmark index to measure the trend of the "market".

Chart 1

Chart 2

WEEKLY AND MONTHLY MACD LINES IMPROVE ... Another reader asked if weekly and monthly MACD lines could be used for bull market signals. Yes, of course. A long-term bull signal usually requires a bullish crossing on "monthly" MACD lines. Chart 3 shows the last one occurring in the spring of 2003. The monthly lines turned bearish at the end of 2007. Although they've started to converge over the past two months (rising histogram bars), which shows improvement, no major bull signal has yet occurred. Keep in mind, however, that monthly lines are always the slowest to turn. Chart 4 shows more promising improvement in the "weekly" lines. The two lines turned positive last November and again in March (with a positive divergence in between). The fact that the faster MACD line has exceeded a two year resistance line is another sign of a likely bottom in the making.

Chart 3

Chart 4

NYAD LINE BREAKS OUT FIRST ... One of the technical signs of better times ahead for the stock market is the ability of the NYSE Advance-Decline to exceed its January high (top of Chart 5). That comes at a time when the S&P 500 is still trading below its January peak. Although that positive divergence argues for a stronger market, it doesn't rule out the possibility of a market pullback to form a "right shoulder" bottom. Interestingly, a similar thing happened during the 2002-2003 bottom as shown in Chart 6. The S&P formed a "head and shoulders" bottom from July 2002 to March 2003. Notice that the NYSE AD (green line) broke out just as the S&P was starting to form a right shoulder at the start of 2003 (green arrow). Notice also that the actual bullish breakout in the S&P 500 took place during the month of May in 2003, which was of those years when the "sell in May" philosophy didn't work. That's why it's important to combine seasonal factors with the market's technical condition. One of our readers asked what would have to happen to rule out a "head and shoulders" bottom this time around. One thing would be an S&P 500 breakout above its January high and its 200-day average.

Chart 5

Chart 6

WHAT TO DO ... One reader asked what to do at this point. Hopefully, some of our positive comments since March has caused some money to tip-toe back into the stock market. With the S&P 500 up nearly 30% from its March low and near overhead resistance, however, I'd be inclined to await a market pullback or some consolidation before committing new funds. If you do wish to commit funds sooner, I'd concentrate on those market sectors that have already exceeded their January highs. I'd also recommend doing things gradually. Don't make big commitments at any one time. Keep initial commitments relatively small and spread them out over the next few months. That way you'll have more to commit if a bullish breakout does occur or a market pullback ensues.