Stepping Inside Sector Strength During the October Rally

Oct 23, 2014: 12:19 PM CST

When we see large price movements in the market – like our recent strong rally over the last week – we can break down the picture into smaller pieces by looking at “Sector Strength.”

We can study which sectors were strongest, which lagged behind, and what this may suggest for the broader market.

Let’s take a look at Sector Strength on the way down from 1,900 (on the S&P 500) and now the path higher:

When discussing sectors, we often break them down into the six “Risk On” or Offensive Sectors that typically do best (outperform) during bullish market phases.

These include Financials, Discretionary, Technology, Industrials, Materials, and sometimes Energy.

We then break down the other sectors as “Risk-Off” or Defensive sectors that tend to do best during down-markets or retracements.

Let’s focus our attention first at the bottom of the chart on the “Defensive” Sectors of Staples, Health Care, and Utilities.

At the moment, Consumer Staples (XLP), Health Care (XLV), and Utilities (XLU) are at or above their recent new highs.

This reveals relative strength because all other sectors are clearly beneath their recent September price highs.

It suggests defensive or cautious money flow from the “Big Money” as they are electing to be more protective during both the retracement and the current rally.

We’ll take a more cautious approach as a result of the stronger “Defensive” sectors relative to the “Offensive” sectors and will monitor the S&P 500 rally closely.

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Corey Rosenbloom, CMT
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