Ready for a market pullback?

Rick_PendergraftThe S&P 500 (market benchmark) has put together a five-week winning streak since the end of July. The trend channel the index has been in for the last year and a half is still firmly in place, and there is little concern that the index might break below its 52-week moving average.

After dropping down out of overbought territory in July, the index has rallied right back up and is back in overbought territory. On the flip side, it has been three years since the S&P was in oversold territory based on both the 10-week RSI and the weekly stochastic readings.

So is the market about to make a significant move?


Even though the S&P stretched its winning streak to five weeks last week, there was something that stood out when I looked at the other indices. The Dow and the S&P gained 0.23% and 0.22% respectively, but the Nasdaq only gained 0.06% and the Russell 2000 actually lost 0.36%. Seeing the larger cap indices outperform the small cap indices makes me believe that investors may be shifting gears a little. I think they are looking to take some gains and lower their risks at this time.

Last month I wrote about sector rotation and how we could be seeing the beginning of a rotation. The gist of the article was that as the market peaked, investors started moving money into the defensive sectors like utilities and healthcare. Since I wrote that article, the top-performing sector has been utilities with healthcare in third place behind the financial sector.

On the other end of the spectrum we usually see the riskier sectors such as technology and consumer discretionary. These two sectors are not at the bottom of the performance for the last 15 days, but they are the middle two sectors out of the ten main sectors that Standard & Poors defines. The two worst performing sectors over the last 15 days have been energy and materials.

What all of these statistics tell me about potential sector rotation is that it looks very much like it has started. Another factor causing me to come to that conclusion was when I ran my weekly bullish and bearish scans over the weekend. The scans are forward looking scans that take into account several technical analysis tools—they look at a couple of overbought/oversold indicators as well as the volume.

Neither the bullish scan nor the bearish scan produced a big list of stocks this past weekend, but there was definitely something noticeable to the names on each list. The majority of the names on the bullish list were energy and utility companies. The most represented sectors on the bearish list were consumer discretionary and financials. This suggests to me that the rotation is getting ready to pick up steam over the coming weeks.

While I don’t think the market is getting ready to crash or anything like that, I do think the market is getting ready to experience a decent pullback. If you are heavily invested in tech stocks, financials or consumer discretionary stocks, you might want to take some of your gains off the table.

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