Is the Market Leadership in Transition?

The broad market looks to be in a transition phase as it attempts to find new leadership. Yesterday’s selling impacted the previous leaders as commodities, retail, industrials, energy and small caps took a direct hit. This of course raises the question of a correction or pullback in the markets. The talking heads are split on the outlook for a modest pullback/profit taking or something more serious. I am in the camp of modest pullback currently. The data behind the move remains positive and the economic data is improving just enough to pacify analysts and investors.

Looking at a chart of the S&P 500 index shows the trend is still drifting higher, and Monday’s move above resistance held despite the early selling yesterday. Scanning the ten major sectors of the index we find the leaders are technology, financials and telecom. The previous leaders consumer services, industrials, materials and energy experienced some selling. Healthcare and utilities were up on increased money flow, however they are more defensive sectors. If money is becoming more defensive it is worth taking note. There is some transition in money flow from investors, but the answers are still unclear on direction. Thus, we have to manage the current risk of the overall market. Now is a good time to evaluate your positions and make the necessary adjustment to protect gains.

Surveying the market overall no major changes have transpired. Sentiment is still positive, economic data remains on a gradual incline, and the trend is still to the upside. The Fed confirmed yesterday in the minutes they are commited to more free money and stimulus to keep the pump primed. Then why the worry? Experience teaches us to always be aware of our surrounding. While many believe they can predict the future, I would rather follow the money, where it leads is where the profits will materialize. Yesterday’s activity may result in nothing or it may be the beginning of a transition in leadership. Watching for confirmation in either direction is the key for now.

Healthcare (XLV) made a move above the November and December highs yesterday and it is worth watching. Breaking the sector down, leadership from the healthcare providers (IHF) is on the rise. The medical devices (IHI) is worth watching as well for a break from the current consolidation near the highs. Pharmaceutical (IHE) stocks have been attempting to break higher but have stalled at the December highs, but still worth watching on the upside. Biotech (IBB) stocks have stalled near the December highs as well, but remain worthy of holding for now. The healthcare sector could emerge as one of the new leaders near term as they remain on my watch list and in my portfolio.

Money still determines direction and leadership. If there is a transition in play, we want to move with the money to take advantage of the resulting opportunities. Be patient and play follow the leader!