Sunday, September 19, 2010

Chart of the Week: Looking for Sector Leadership

Stocks have rallied impressively since the beginning of July, but during that period, that has not been a particular sector which has led the rally. The lack of strong sector leadership can be seen on the one hand as a potential impediment to further bullish moves, but also as a sign of broad-based support for stocks and a potential inhibitor to a correction.

In the chart of the week below, I show the performance of the nine AMEX sector SPDRs since the market’s July 2nd lows. Note that materials (XLB) and industrials (XLI) have been the top two performing sectors during the past 2 ½ months, reflecting the relative strength in manufacturing. The other two sectors that have outperformed the SPX during this period, consumer discretionary (XLY) and technology (XLK), both showed signs of coming to life last week.

Going forward, materials and industrials can conceivably continue to lead a bull leg, but the rally will benefit substantially if one or more of the others sectors rises to meet the challenge. For now at least, my money is on technology to step up. That being said, the consumer and financial sectors cannot afford to be a significant drag on stocks or the current rally will likely run out of steam.

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