Sector Rotation and Volume Concerns

We wanted to quickly point out two items. As the market rallies further, one needs to keep an eye on the sectors that are leading the charge. Over the past thirty days, the top performing sectors have been in economically defensive sectors. The consumer staples sector has led the charge up 5.4% with health care and utilities following close behind up 5.2% and 4.7%, respectively.

Could this be more a short term anomaly or something more?

As seen in the figure below taken from stockcharts.com, market tops into bear markets are usually preceded by strength in staples, healthcare and utilities.

We are also a little troubled by the market rally on lower volume. As seen below, volume on the S&P 500 has been declining even as the market continues higher.

Bottom Line: We continue to have upside exposure to markets but are convinced of a coming market correction. We will be ready to finish taking profits and move to a bearish stance as soon as our market models indicate the need to do so.

We would like to wish all of our family, friends and client a happy and healthy holiday.

- Joseph S. Kalinowski, CFA