Weekly Sector Relative Strength

Week Ending 10/31/2008


Last week I wrote:

“...some excellent groups are sold too far down.  Soon, maybe this week, these groups will be bought with a lot of idle cash. 

That, indeed appears to be what has happened.  All groups were up this past week, and all but Tobacco had either the same or more volume than the week prior.  Figure 1 shows the percent change for each industry group over the past week.


Figure 1

Weekly Price % Change 



The volume increase indicates possible sideline money entering the market again.  This is healthy to see after such oversold conditions.  Furthermore, this week was the first time since the week ending February 1, 2008, that all sectors closed with gains.


Which groups had the biggest swings, from negative last week to positive this week?  Using the “Diff from previous” option, we see that Real Estate, Metals & Mining, Leisure, and Manufacturing all turned around pretty big (Figure 2, below).  These are pretty volatile groups, so no real surprise there. 


Figure 2

Weekly Price % Change,

difference from previous week



The Leisure group, which includes casinos, restaurants and lodging, may be the biggest surprise.  All economic data point to a slowing economy, and these groups stand to lose revenue in that environment.  Nonetheless, a rising tide lifts all boats.


Relative Strength

Looking at the weekly performance against the S&P500, we see the traditional defensive names underperforming the market this week. 


Figure 3

Weekly Price % Change vs. S&P 500



Figure 3 shows Health Services, Tobacco, Utilities, and Drugs all underperforming the market by a range of -.9% to -5%.  Remember, all groups were up this week (Figure 1), but those below the blue line in Figure 3 were up less than the general market.  This is another confirmation that, at least for this week, money stopped flowing into defensive names relative to beaten down cyclicals. 


This will be an important relationship to watch going forward into next week, when we get the monthly Nonfarm payrolls and Unemployment rate on Friday morning.  My hunch is that this snap-back rally in the cyclicals is only temporary, because as I mentioned, recent economic data doesn’t point to much global good news.  As such, I wouldn’t place any long-term buys on the groups that outperformed this week.  Trade quickly in these names if you want to play.


Déjà Vu All Over Again

I suppose it was bound to happen.  The week which ended on Halloween brought with it a spooky ghost from the past.  I mentioned earlier that this week was the only week since February 1 in which all groups were positive.  On a hunch, I looked at that same week using the relative strength settings (same as Figure 3 above), and wouldn’t you know it, almost all of the groups performed the same way. 


Figure 4

Weekly Price % Change vs. S&P 500, 2/1/08



Figure 4 shows 2/1/2008 sorted the same as Figure 3, on 10/31/08.  Except for 2 groups above and 2 below the blue zero line, all other groups performed the same, relative to the S&P 500.  This tells me that the general sentiment last week was similar to what it was after that first big drop at the end of January.  Going forward, the results were mixed and inconclusive of a trend.  Compare the 2/1/08 column in Fig 4 with the 10/31/08 column in Fig 3.  Pretty similar.


For some perspective, the market had just finished one of its first big swooshes down of the bear market.  Figure 5 shows the SPY during the two periods in question.  As you recall, SPY is the ETF used as a tradeable proxy for the S&P 500 index.


Figure 5

SPY, Daily

The big difference between February and now is that the groups which outperformed both times are much more beaten down now than they were 9 months ago.  This rally could last, or it could peter out with defensive names getting attention again.



This week represented at least the start of a typical bear market rally.  Nice for the bulls, but a bear market rally nonetheless.  Let’s not forget that until otherwise notified, we are still in a bear market, and the professionals always look to these rallies to sell into.  I’m not saying that we will fall back to new lows anytime soon.  In fact, I think we are set up for a nice 4th quarter rally.  Things I’ll be looking at over the next couple of weeks are:   

  • Was the rotation back into oversold cyclical names a one-hit wonder, or is more money flowing in to these groups?
  • Does the economic data point to a stabilization of home sales, jobless claims, consumer sentiment and spending?  If not, then this bear market rally will likely fail after all the excitement of bargain hunting wears out.  If so, then the bulls will front run the anticipated economic recovery and carry the rally much higher.

Take Care,