STOCK MARKET NEEDS BROADER SECTOR PARTICIPATION -- SIX MARKET SECTORS HAVE YET TO HIT A NEW HIGH-- THREE THAT HAVE ARE DEFENSIVE IN NATURE -- ENERGY IS THE YEAR'S WEAKEST SECTOR
SECTOR BREADTH ISN'T BROAD ENOUGH...One of the ways to measure the strength of the stock market's uptrend is to see how many of its eleven sectors have hit new highs with the major stock indexes. In a strong uptrend, most market sectors should be confirming the market's move to a record high. Unfortunately, that's not the case this year. In fact, six of the eleven sectors have fallen short of record highs. And most of ones that have hit highs are defensive in nature. That's not a good sign either.
Five market sectors have hit record highs this year. Three of them are bond proxies like REITs, utilities, and consumer staples. All three are also defensive in nature and usually lead major market advances in the late stages of a bull market. The two others to hit new highs are consumer discretionary, which is more economically-sensitive, and technology. Tech traditionally does better when investors are looking for growth that isn't available elsewhere. That's not exactly a vote of confidence. The three defensive sectors mentioned above are still well into record territory. Chart 1 shows the Technology SPDR (XLK) pulling back this week to retest last October's record. Chart 2 shows the Consumer Discretionary SPDR (XLY) falling back below last October's high. That's not an encouraging sign. Our main concern, however, is with the sectors that haven't hit new highs.
A LOOK AT THE SIX SECTOR LAGGARDS...The following charts show the six sectors that have yet to hit new records. Chart 3, for example, shows the Communication Services SPDR (XLC) backing off sharply from its previous peak formed last July. Charts 4 and 5 show the Industrials SPDR (XLI) and Health Care SPDR (XLV) failing tests of two previous peaks. Charts 6 and 7 show the Financials SPDR (XLF) and Materials SPDR (XLB) backing off from last September's highs. Finally, Chart 8 shows the Energy SPDR (XLE) lagging way behind everything else; and unable to even clear its 200-day moving average. That's obviously the result of a weak energy market. No serious chart damage has been done to most of the charts. But they do show that most market sectors have yet to confirm this year's market move to record territory. In order to keep their major uptrends intact, however, it's important for those lagging sectors to stay above their June lows. Energy may already be failing that test.
