Thursday, May 7, 2009

Weak leadership imperils market advance

Further to my last post entitled Respect this market rally, there are further data points that point to a high risk environment for this equity market.

It is sometimes instructive to analyze market relative charts to see who the market leaders are and how the leadership is behaving. Technology had been standouts in the past few months. As the chart of the Technology Select SPDR ETF (XLK) relative to the S&P 500 below shows, the sector has been plummeting against the market and has broken down below a support zone.

Technolgy vs. S&P 500


The Financials had taken up the leadership mantle since the March bottom, but as the chart below of the XLF relative to the S&P 500 shows, the sector may be running into relative overhead resistance soon.

Financials vs. S&P 500


The best relative performers since 3Q 2008 has been emerging market stocks. The chart below of the iShare MSCI Emerging Market ETF (EEM) relative to the S&P 500 shows that it, too, is likely to encounter relative overhead resistance soon.

Emerging Markets vs. S&P 500


These pictures of faltering leadership and relative overhead resistance for recent leaders point to limited near-term upside potential for equities here.

4 comments:

Bill Luby said...

Well done, Cam. Like you, I have been watching the divergence in technology (and the NDX) closely and keep thinking that financials cannot continue to drag the large techs up much higher, but the resilience of the bulls (and the flow of money from the sidelines to new long positions) has me wondering if we are just entering a consolidation period.

Nice work on the blog from a long time reader,

-Bill

ArbCo357 said...

This is true. Tech (XLK) has outperformed. However this outperformance has only really started to materialize since Jan 09, and has been about 20%. Compare that to the range of +-10% relative to SPX since 2003 (I exclude the burst of the IT bubble). Compared to that Financials (XLF)really started to underperform Tech since late 2007 and gave back all the performance including the IT bubble melt-down. So it's difficult to conclude that you would need both of these sectors outperforming SPX. My impression is that the recent lag in XLK is coming from those who decided that it was a bit too much outperforming the general market (probably on the account of Obama's election), and that recently value and cyclical plays were leading the rebound. So a lot of things lined up against tech, the macro story (if you believ in normalization), valuation, relative value, etc. Could be temporary of course. But it's not as scary if you are looking at it from a longer term perspective.

Blue said...

What do you make of this strange looking chart, which compares the S&P to the Dow?

ArbCo357 said...

Nice chart. It's not strange looking at all. Because you are comparing two somewhat similar indices (US equities) it's very mean reverting, so the intra-day volatility is actually higher than the long term trend. In reality those candles are a bit moot, as you would need to know the special quotation price of an SPX and DOW basket (where all the stocks are open) to arbitrage this. It can be done if you are doing high frequency and have a basket trading system at your disposal. Or you can try the futures but I bet it's not easy to trade.

On the upward trend: that's because S&P went down more in the October (check a longer term chart, preferrably a line not candles).

On why is there a trend at all: different sector and stock composition (weights) of the indices.