Markets Rise as Leadership Shifts

06/01/2009 10:51 am EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, says stock prices are still way ahead of weak economic data, and he notes recent changes in sector leadership.

As the market keeps moving higher, the conflict between its performance and the economic data gets sharper and sharper. Investors continue to price in growth as they buy on each pullback and test of support.

In the last 30 minutes of trading on Friday, the Standard & Poor's 500 index moved up 1%, resulting in a 1.35% gain after being relatively flat most of the day. There's all kinds of speculation about why, but money flow continues into the broad market despite the weak data. For this reason, I am very cautious about the broad markets in the short run.

And when we drill down to the sector level, there appears to be a change in leadership. The energy sector stepped forward, gaining 5.4% for the week. Crude oil prices were the driving factor: They moved above $66 a barrel, up nearly 10% on the week. Gasoline rose 7% for the week, while natural gas soared 14%.

Commodities have been exerting new leadership over the last two weeks. Gold is moving closer to the $1,000 per ounce mark. The fear of inflation is back. While this may not be good for the economy in the long run, it is helping fuel the markets higher now.

All ten sectors we follow ended the week higher (see the table below). Semiconductors again showed positive signs of leadership, pushing technology up 5.2%. Internet stocks rallied 6.2%, while networking gained 4.8%. The basic materials index moved through resistance at 180, gaining 4.6%, Industrials were up 3.4%, utilities rose 3.8%, and telecom gained 3.6%.

Treasury yields are a new short-term concern for investors, as Treasurys had one of their more volatile weeks. The spike in yield on the ten-year Treasury note, up to 3.7% from the previous Friday's 3.35%, was extraordinary. On May 13, it yielded 3.1%, and on March 14, it was as low as 2.55%.

This is a worrying signal that the Federal Reserve may eventually have to hike short-term interest rates to meet the rise at the long end of the yield curve. Either way, this isn't a good sign, because the data points aren't adding up.

This brings me back to where I started: Stock prices are moving higher, but the data aren't supporting the move. Call it speculation or whatever you like, but the discrepancies between the two will have to be rectified in time. Either the data will have to improve to support higher share prices, or stocks will have to drop to reflect the economic data.

Despite the positive showing, we still face resistance at the upper end of the trading range on both the S&P 500 and the Nasdaq Composite index. I will be watching for any break higher in the broad market indices this week.

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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