Over the past several weeks, it has been difficult to find clear sector leadership, with the possible exception of healthcare. It has, however, been getting easier to spot industries with relative weakness to the broad market. Financial, Energy, and Retail sectors are all showing relative weakness. Since all the main stock market indexes are still above their "swing lows" from late June, any sector indexes or ETFs already trading below their closing lows of June could be defined as having relative weakness to the broad market. If short-term sentiment remains bearish going into the new week, expect these sectors to show leadership to the downside. Below is a daily chart of the S&P 500 SPDR (SPY), a popular ETF proxy of the benchmark S&P 500 Index, as well as charts of iShares Regional Banks (IAT), S&P Energy SPDR (XLE), and the Retail HOLDR (RTH). Notice how SPY is still (barely) holding above its late June closing low (which is also its "neckline"), but IAT, XLE, and RTH have all broken down to new closing "swing lows:"

Any ETFs that have already broken down below their June lows, such as IAT, XLE, and RTH, have now entered into intermediate-term downtrends, as they have formed significant "lower highs" and "lower lows" on their daily charts. As with our new downside expectations of the broad market (as per our July 1 commentary), this does not mean these ETFs will fall all the way back to their March 2009 lows. However, retracements of half to two-thirds of their gains (from the March lows to June highs) is statistically likely. A test of the March 2009 lows is certainly not out of the question, but a more realistic downside target, at least in the short-term, is a two-thirds retracement of their gains off those lows. Presently, we're positioned in "short ETFs" that track the Dow Jones Industrials (DXD), Financials (SKF), Real Estate (SRS), and Energy (DUG), each of which is now showing an unrealized gain.

Obviously, the possibility exists that the market will surprise us by quickly snapping back to recover last Thursday's losses. But even if it does, sectors and ETFs with relative weakness should recover at a much slower pace, and with less intensity, than the main stock market indexes. For that reason, short positions should be in sectors exhibiting relative weakness to the broad market, not strong sectors one merely thinks should "catch up" to the weakness in the other sectors. If you make it a habit to always trade what you see, not what you think, you'll stay out of trouble while other traders follow the dismal path of "hope."