Sunday, January 27, 2013

Jan 27. Some Observations On Correlation Between SPX And Sector Breadth.


The Sector Breadth Model (SBM) continues to register strengthening internals across all market sectors. As a reminder, the SBM measures the sector breadth calculating BPI of nine sectors. The Bullish Percent Index (BPI) is a breadth indicator based on the number of stocks on Point & Figure buy signals within a group of stocks or index. Currently the SBM includes 2800 stocks in 9 market sectors.
This week the Utilities sector switched from sell to buy mode and now all 9 market sectors show the strengthening breadth. With all market sectors in buy mode it is interesting to take a look how the market sectors switched from buy to sell and vice versa during peaks and valleys in the SPX in 2012.

At the end of the first week of 2012 all market sectors were in buy mode. Then in the first week of March the Materials switched to sell mode (red box), the following week – the Energy and so on. The Financial sector was the last one switching to sell in May not long before the final bottom in the SPX was reached.
Five weeks later the Industrials and Energy switched to buy mode in the third week of June (green box) confirming that the worst is behind. Other sectors followed with the Financial sector – the last one in the late August. Note, that the Utilities never switched to buy mode during the summer run.
In the second week of October the technology sector switched to sell mode (red box) signaling that the market passed its peak and other sectors followed. The turn of switching was different though. In the second week of November the Industrials and Financial sectors concluded the process of switching to sell mode among sectors.
Four weeks later, in the second week of December four market sectors reversed back to buy mode providing a strong confirmation that the interim bottom was formed.
Now, when all market sectors in buy mode I wouldn't worry about the possible market turn until one of sectors starts showing signs of breadth deterioration. Analyzing the previous data we can’t say which sector it is going to be. I think it depends on the prevailing economic micro-cycle. Nevertheless, if history repeats itself, a switch of one of market sectors to sell mode may signal about the coming meaningful correction.

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