STRATEGIES

A popular strategy, sector rotation involves choosing winning sectors from the broad market and tilting your portfolio towards them. As we start a new month, MoneyShow’s Tom Aspray takes a technical look at which sectors are poised to outperform.

Stocks corrected for the second day in a row, but once again the losses were small though most of the major averages did close below Wednesday’s lows. Of course, the wild card is Friday’s monthly jobs report. The ADP report came in well above estimates at 192,000.

If the jobs report is weaker than expected, it could cause some heavier selling but I would expect the market to be well supported at lower levels. In fact some heavier selling could be a plus as it would help to reduce the rising bullish sentiment.

In the last Week Ahead column, I discussed the seasonal tendency for the stock market to decline in February. So far, we do not have any sell signals but there are some signs that there has been a loss of short-term momentum.

I continue to think that now is the time to be cautious and work on your buy list as there should be a better buying opportunity in the next month or so.

So should you be looking at the large cap, mid-cap, or small cap stocks for your buy list?

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Chart Analysis: The Spyder Trust (SPY) exceeded the equality or 100% target this week at $150.70 with the trend line resistance, line a, now at $152.40. It has risen just over 12% from the November lows.

  • The 20-day EMA is now at $148.07 with more important support at $146.42, line b.

  • From the recent highs, the 38.2% Fibonacci retracement support is now at $144.73.

  • The NYSE Advance/Decline line did confirm this week’s highs. It is still well above its WMA and the uptrend, line c.

  • The McClellan oscillator has dropped below the zero line and its uptrend, line d.

  • The late December low was at -128. It is now at -27.

  • On a daily close back above $150.70, the SPY should rally to convincing new rally highs.

The NYSE Composite made new rally highs Wednesday at 8944 with the daily starc+ band now at 9017. For next week, the starc+ band. will be at 9106.

  • The rising 20-day EMA is at 8821 with further chart support at 8674-8740.

  • The daily uptrend, line e, is currently at 8636.

  • The 5WMA of the H-L has dropped below the 13 SMA but it did confirm the highs (line f).

  • There is more important support at the uptrend, line g, and then at the late December lows.

  • The number of NYSE new highs peaked at 440 on January 2 and then hit 435 on January 24.

  • This slight divergence does not seem enough to suggest that a top is in place.

NEXT PAGE: Sectors Showing Strength & Weakness

Tickers Mentioned: SPY, MDY, IJR, RVT, RMT