Market Leaders May Have Changed

12/15/2008 2:02 pm EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, sees some new sectors exerting leadership as the market struggles to advance.

The ten sectors of the Standard & Poor’s 500 index fought to a draw last week—five winners and five losers—in another volatile week of trading.

One notable trend, though, was that previous losers began taking on a leadership role. The biggest winner of the week was energy, led by crude oil moving near the $47 mark, a gain of nearly 12%. Energy Select SPDR ETF (NYSEArca: XLE) gained 9.3% and the ETF is showing signs of breaking out of the consolidation pattern that has developed over the last ten weeks. This is one ETF to add to your watch list this week.

Another strong performer was former laggard basic materials. The Materials Select SPDR ETF (NYSEArca: XLB) gained 5.3%. The chart shows a break of the short-term down trend line near $23. (It traded above that Monday morning.) If the trend in oil continues, I expect this sector to tag along for the ride.

Some strength in the technology sector helped lead the Nasdaq Composite index higher by more than 2% for the week. Why the sudden leadership from technology? Many of these companies have large cash balances, so they don’t need as much credit as other companies do—a real plus in the current credit crunch and when the economy rebounds.

So, it’s no wonder iShares Goldman Sachs Semiconductor Index ETF (NYSEArca: IGW) gained 4.7% last week. This has been added to my watch list for a break above the 50-day moving average of $29.65. IGW closed Friday at $28.93. We need leadership from other sectors of the market and technology would be a great addition.

The other leaders were Utilities up 1.5% and Telecommunications up 1.1%. If these five continue to show strength this week, look for the current bounce off the November 20th low to continue and challenge the November 4th high of over 1,000 in the S&P 500. These sectors could provide the missing leadership the market needs.

Last week’s losers were led by financials, a volatile sector that has driven many investors to drink or to the poor house. Financial Select Sector SPDR ETF (NYSEArca: XLF) was down 5.3%, but fell more than 11.2% from last Monday’s close. Unless you have a crystal ball that tells you when the volatility in this sector will end, it is tough to play.

Oppenheimer’s presciently bearish research analyst Meredith Whitney stated last week that the big five banks would not be profitable or grow for the next 18 to 36 months. That kind of outlook hasn’t helped the sector, and for now I am willing to watch it from the sidelines. 

The other losers were consumer staples, consumer discretionary, industrials, and health care. Two of these sectors are of interest to me looking forward. Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) and Health Care Select Sector SPDR (NYSEArca: XLV). Both have shown signs of improvement and are worth keeping on your watch list.

The table below shows a list of ten sector ETFs, with my assessment of some key benchmarks to watch in the weeks ahead.

Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.

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