Looking For Some Divergence/Leadership in the Broad Market

One of my favorite lines when listening to market commentators is what “popped” and what “dropped” relative to stocks. Each day I scan the sectors looking for the same emphasis, did something pop or drop that will change the outlook for the broad market. Since the recent low on April 23rd I have been looking for leadership to emerge if the S&P 500 and other major indexes are going to break to new highs. The chart below is the ten sector ETFs of the the S&P 500 index. It starts on April 23rd through May 2nd close. The top two lines are the leaders since the low. The first is Consumer Services, second, Energy and third, Technology. Currently they are the only three sectors to out perform the index overall. Financials are equal to the index with the rest lagging.

It is equally important to look at the strength of the leadership relative to the index. Consumer Services is 2% above the index with Technology and Energy is just 0.5% ahead. On the downside Consumer Staples and Healthcare are 1.1% below the index. Put it all together and there is little to no leadership in the market outside of the Consumer Services. In addition the ten sectors are trading pretty much in unison or there is a lack of divergence. That is a sign of lethargy or lack of conviction. The correlation between the sectors is high currently and creating an all for one and one for all movement.

The chart below is the same ten sector except it goes back to the lows in October which we know now was the beginning of the current trend higher. In January and February when the move accelerated the leading sectors were 4-6% above the index. There were 4-6 sectors outperforming the index during that period of January through March. Leadership is essential to a trends continuance. Financials and Consumer Services remain in a positive position relative to the broad index and are the hope looking forward for leadership to lead the overall markets higher.

What does this all add up to as we look toward the future? It shows the uptrend is tired essentially when looking at the chart above. The financials which had a big lead on the broad index of more than 7% in March was the leader in the April 10th test of support. As noted in the first chart they have not been the leader off that test. They have been an equal performer to the broad index. If the bounce is to gain momentum the sector will have to accelerate and take on a leadership role. On the other hand the consumer has started to accelerate and widen the gap to the broad index showing solid leadership. It needs some help from financials and technology. Technology had a nice burst higher off the low, but has started to stall again. Without strong leadership the market will have a difficult time regaining and sustaining the previous uptrend. Thus, the current sideways trend.

Sectors to watch as we head towards the end of the trading week to take on some leadership are… Technology, Financials and Energy. Each are in a position to push through on the upside. Each has posted solid earnings thus far. The bulk of energy earnings are in front of us and they could provide a spark to the broad market. The difficult component facing investors currently is patience to let this develop with the understanding everything has slowed relative to growth.

More economic data is on tap with the ISM Services, weekly jobless claims and productivity numbers out today. Watch investor reaction to the data and the impact on the sectors above. Look for some divergence in the sectors if the upside is to break higher and reestablish the uptrend. But, most of all, be patient and let the direction present itself near term.