Sector Strength – June 17

Jun 17, 2007: 8:52 PM CST

Attached is a harrowing picture of the current state of what’s strong in the market over the last three months.

I am including a line chart and a bar chart to convey the point and clearly identify differences in prices:sector-lines-june-17.jpg

sector-bars-june-17.jpg

Clearly, we see that had you invested in the strong energy sector, you could have returned upwards of 14%, while no other individual sector came close (technology and industrials have risen 2% each). Keep in mind this picture is merely a snapshot of the last 65 trading days as of June 15th.

Because of interest rate yields rising, the utilities were the worst performing sector, losing almost 6%. It is a good sign for the overall market to see this, as well as th fact that the ‘defensive’ sectors (healthcare and consumer staples) suffered relatively large declines as well. This points to underlying strength in the broad market and the actions of the ‘big money’ institutional players.

It is a longer-term trend, but we seem to be nearing the late bull phase, as evidenced by the rampant strength in both interest rates/yield and energy prices – especially that of crude oil. This is no reason to bail on long positions or shift your portfolios yet, but it does serve as a general caution that defensive times may be nearing but are not here yet.

Here is a great example of why we’re seeing the sharp rise in the energy sector – it’s partly driven by rising crude oil prices, but unless you trade futures, it’s difficult to take advantage of the rally.  View this solid uptrend of Exxon-Mobil (XOM):

xom-june-17.png

As a bonus, I am attaching a short-term (30 day) picture of the recent action so that you can begin to find strong stocks in strong sectors to generate alpha. Remember that longer-term readings tend to carry more weight, but are slow to react to immediate changes that can be detected on shorter time-frames.

sector-30-day.jpg

We see a similar picture as above, but even more pronounced evidence in the strength of the underlying market (in terms of Sector Rotation Theory). This is what we would like to be seeing, as money is clearly flowing from one sector straight to another in a steady progression (money tends to flow left-to-right on the chart developed by StockCharts.com).

As always, use this as a guide to find strong stocks, or simply play swing trades or even position trades on AmEx Sector SPDRs.

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