What’s Driving the Market Higher?

Rotation of money is flowing from the defensive sectors towards the growth sectors. Is this a trend shift that will stick? That is the big question that we will have to track going forward. For those of you who are subscribers, and use our sector rotation chart, you have seen this developing over the last week of trading. The chart below gives you a view of the ten sectors that are the S&P 500 index compared with the index (white). It is simple to see in this picture the separation of consumer staples, utilities and healthcare from the rest of the market. Some key earnings weakness in each of those sectors was the catalyst for movement of money, but the momentum in technology, materials, financials, industrials and consumer services were an attraction for money flow. This is a development short term worth keeping an eye on for trading opportunities as they arise.

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Commodities are showing some signs of life as well with money finding its way into copper, oil and gasoline. All three are trading higher, my view, on pure speculation that the economic picture is much better than it was a week ago. Amazing what a “good” jobs report will do! I am not convinced the transition will develop into a trend, but there are trading opportunities within the sector short term.

Taking this a step further we have to ask what the air strikes by Israel on Syria will mean to the geopolitical risk in oil prices? Oil has already moved to $96 a barrel, will it price more risk in if this situation escalates? This is definitely something to watch going forward, it will impact the price if production interruptions are anticipated. All of the movement in crude, natural gas, gasoline, etc, has pushed the energy sector back into a leadership role. The future of energy is bright long term, but I expect there to be volatility short term as the sector works its way through the minefield of issues.

Technology continues to provide the leadership currently as money flows into the sector. Semiconductors (SOXX) broke to a new high last week and gained nearly 12% off the April 18th low. Internet (FDN) has hit a new high as well gaining roughly 8% off the low. Software (IGV) is up nearly 7% off the low and Networking (IGN) has been the weak link gaining only 4%, but establishing a break from the base off the recent low. The sector may be extended short term, but upside is still very much in play. Watch for a test or pullback to provide a better opportunity on the upside.

Technology is driving the NASDAQ 100 index higher as the large cap technology stocks have been a key mover for the sector, the index and the broad markets. Apple bounced off the recent lows along with Microsoft, Intel and Google to lead the way. The question is more related to do they have more left to continue the upside trend for the broad markets? All of those above have gained more than 15% on this move and have done so without a test to this point. This is worth watching for the resulting opportunity up or down.

What about the biotech sector? Some disappointing earnings from several large cap stocks and the rally is over? XBI, SPDR Biotech ETF has struggled the last two weeks to regain the upside momentum. The resulting consolidation pattern however isn’t bad. The uptrend remains in play and the outlook remains positive. Look for the¬†opportunity¬†in this pullback versus selling and running. IBB, iShares Biotech ETF chart is still moving higher and has maintained momentum thanks to the small and mid cap stock exposure in the fund. XBI is the large cap stocks and thus, the pullback relative to earnings. Both fund still have the upside looking forward.

There are plenty of positives in the market relative to the charts. The fundamental disconnect in some sectors and the economy are the concern. You can’t blindly assume that all is well because we added 165,000 new jobs. The “recovery” at some point has to stop being a recovery and become growth. I am willing to take what the market gives, but the risk of the market is rising and for that reason we have to develop a defined exit strategy for every position in our portfolio. A plan in place eliminates the anxiety of decision making when things go bad or the downside of the market becomes the trend.