Sector Breakdown Shows Strength

By Joey Fundora | March 09, 2010 AAA

While some individual indexes such as the Russell 2000 and Nasdaq Composite have managed to trade to new recovery highs, the S&P500 and Dow have yet to match this feat. Because the markets are overbought as the indexes test these levels, the possibility of a reversal cannot be ignored and some traders fear that a significant high will be in this area. With the markets currently at this critical level, it makes sense to drill down to specific sectors to see if we can glean any clues from the performance of different groups. It's interesting that despite the fact that the S&P and Dow haven't set new highs, several individual sectors are well into new recovery high territory. Even more interesting is what types of groups are hitting new highs, and it may come as a surprise to many people simply paying attention to economic reports. (For related reading, check out Singling Out Sector ETFs.)

For instance, one sector that has been on fire is the retail group. The group, as represented by the SPDR Series Trust S&P Retail ETF (NYSE:XRT), recently cleared a large base and has been running higher for almost two months. It's interesting that a sector based on consumer spending would be performing as strong as it has with unemployment numbers still quite high and the general consensus that the economy is still in a fragile state. XRT has refused to give up much ground after a sharp rally last summer, and cleared the recent base even as the general markets were showing weakness. While it's currently overbought, it looks like XRT will have buyers waiting just below $37.

Source: StockCharts.com

iShares Dow Jones US Real Estate (NYSE:IYR) is another group that many may be surprised to find at new recovery highs. The commercial real estate sector is a group many have been writing off and despite the negative sentiment, it keeps on inching higher. While IYR has not been on a tear, it has had a pretty sharp move the past few weeks and has managed to clear its 2009 high. It has been setting higher highs and higher lows for the past several months, and remains relatively healthy.

Source: StockCharts.com

Another group that has been surprising traders is the homebuilders. The SPDR Series Trust S&P Homebuilders ETF (NYSE:XHB) is also at new recovery highs despite the negative data surrounding home sales. XHB has been consolidating since last August, after a sharp move higher last July. It is just beginning to emerge from this base and is well ahead of the major indexes. An important level to watch moving forward would be the $16 area, which held back past rally attempts and should now serve as support.

Source: StockCharts.com

SPDR Series Trust S&P Biotech ETF (NYSE:XBI) reveals another group that has been acting very well lately. Many biotech stocks have been surging recently, and XBI has been benefiting. It is also already clearing a base and is ahead of the general markets. When sectors that have more inherent risk than others are leading the way, it reveals that investors are being more aggressive and seeking greater returns rather than trying to protect their portfolios. This is a subtle clue that fear is not creeping back into the markets yet.

Source: StockCharts.com

Bottom Line
While the major indexes have yet to set new recovery highs, many sectors are quietly leading the way higher. It is healthy that several of the sectors making new highs are in much-maligned industries. This reveals that investors are being aggressive, and that should eventually translate to the general indexes following suit. While traders should not be complacent, the action in individual sectors is not revealing any major technical issues at this point. Typically, you will see sectors and stocks diverging lower in a market top, but this is just the opposite. While the markets aren't in the clear yet, the performance in the individual sectors is hinting at a rise in the general markets. (For more, see Top Down Analysis: Finding The Right Stocks And Sectors)

The author does not hold a position in any of the companies mentioned above.

You May Also Like

Related Analysis
  1. Stock Analysis

    Buy This Top Ranked Retail ETF to Enjoy Strong Christmas Sales - ETF News And Commentary

  2. Chart Advisor

    How To Trade The Biggest U.S. Companies In 2015

  3. Chart Advisor

    'Tis The Season For Food And Beverage Stocks

  4. Chart Advisor

    Commodities Set Up For A Continued Move Lower

  5. Chart Advisor

    Are These Uptrending Stocks About To Move Higher?

Trading Center