Breadth of Rally Is a Very Good Sign

06/05/2007 12:00 am EST

Focus: MARKETS

Mark Arbeter

Chief Technical Strategist, S&P Capital IQ

Mark Arbeter, Standard & Poor's chief technical strategist, says the broad participation of many sectors in the current bull market is very positive and suggests the rally can continue for some time.

Onward and upward! The stock market continues its assault on new record closing highs like the Allied Armies at the D-Day beaches.

The Standard & Poor's 500 tried to eclipse its all-time high during four straight days [before finally breaking the record late last week.] We think the market is demonstrating "blowoff" characteristics, and the only issue is whether it will be of "mini" or "major" proportions. We would prefer a mini-blowoff, as the major blowoffs of 1987 and 1999 to 2000 ended badly. Stay tuned, as things are heating up.

A broad list of major indexes has posted all-time highs, including the Dow Jones Industrial Average, the Dow Transports and Utilities, the S&P SmallCap 600 and the S&P MidCap 400s. Can it get any better than this? If you're in stocks, you'd better be making money, because this is certainly a broad and diverse opportunity.

Since the bear market bottom on Oct. 9, 2002, the S&P 500 is up about 97%. The NASDAQ Composite index, which dropped a lot farther than the blue chip indexes during the bear market, has risen about 133%. But the real winners since the 2002 low have been the smaller stocks, with the S&P SmallCap 600 up about 157% and the S&P MidCap 400 up 144%.

The best performing S&P sector, since its July 2002 low, has been energy, soaring about 216%. Energy stocks had lagged the S&P 500 for almost all of the 1990s, and they represented a new leadership group following the bear market.

Utilities represented the second best performing sector, surging 179% since the bear market low. Utilities also underperformed the S&P 500 during the 1990s and got pounded during the bear market, plunging more than 50%. Material stocks have the third best bull market record, roaring ahead by about 142%. The sector badly underperformed the benchmark from late 1994 until late 2000.

Telecom, which had gotten wiped out during the bear market, is fourth, rising 124% from its bear market low. Information technology is fifth, recovering 123%, but it remains well below its 2000 highs. Industrials and financials are next, both up a little more than 100%.

The three sectors that have underperformed the S&P 500 are consumer discretionary, health care, and consumer staples. Health care and staples are considered defensive sectors, and many times do better during tough overall market environments. The bear market in housing stocks has stymied the discretionary sector.

The broad sector participation is bullish, in our view, and suggests the market has further up side. It is only when participation becomes more selective-large cap technology stocks in the late 1990s, for instance-that we will become more concerned about the staying power of the bull.

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