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Sector Detector: Quack, Quack…Ducks Are Lining Up For The Bulls

 February 09, 2012 09:32 AM

The stock market is behaving extremely well from a technical perspective. And why not? The world seems stable enough to give investors the confidence to maintain a "risk-on" allocation. Sure, there is still plenty to worry about. But more and more, investors are growing bolder. The Dow is at its highest level since 2008 and wants to challenge 13,000. The Nasdaq is at its highest level since 2000. 

All the central banks are joining forces to keep debt-laden countries solvent and prevent Europe (and by extension, the planet) from falling back into recession. And in this election year, the Obama administration is ensuring that all efforts are focused on supporting the economy and creating an environment conducive to job growth. History shows that re-election is nearly impossible otherwise. Although the longer-term impact of all this fiat liquidity flooding the globe is uncertain, for now it is doing its job well. 

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What else? Well, consumers are spending again, which is fueling expansion in the manufacturing sector. Even GM is back on top as the best-selling automaker. And then there's the resurgent IPO market, with last week's Facebook filing getting investors all atwitter (pun intended). In fact, things are going so well that even our less-than-loveable TSA is lightening up a bit and introducing a "Trusted Traveler" program to greatly shorten the screening process for frequent fliers. Yes, life is good…or at least it's improving. 

Among the 10 U.S. sector iShares, Financial (IYF), Energy (IYE) and Technology (IYW) have been leaders lately. And as I'll discuss shortly, the Sabrient SectorCast ETF rankings continue to display an increasingly bullish bias. 

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As usual, the main worry has to do with Greece. Last I heard on Wednesday night as I write this is that a deal is almost done. The severity of the reforms and austerity program has been tough for all members of the coalition government to swallow, but they have little bargaining power given Greece's desperate need for rescue funds and a bond swap. Optimistic bulls seem to be expecting (or hoping for) a deal to happen imminently. 

Looking at the SPY chart, the market is still consolidating in place while working off its overbought technicals, but it there is no denying that it is behaving extremely well. Morning weakness is invariably met with buyers during the day, leading to a strong finish. This is bullish behavior. The only fly in the ointment is the persistently low trading volume, which tells me that individual investors are still reluctant to enter the market while institutional investors continue to accumulate shares. 

RSI, MACD, and Slow Stochastic are all quite overbought. I expect to see a final push to challenge the highs from last summer, but before a strong breakout occurs, the market really needs to cycle back down to short-term oversold, and perhaps test the uptrend line, which coincides with the first line of support at 128. This would provide much better footing from which to launch an assault on those highs. 

The VIX (CBOE Market Volatility Index—a.k.a. "fear gauge") closed Wednesday at 18.16, which (like the overall market) is about where it has closed the prior two Wednesdays. This is bullish for stocks as it indicates a lack of investor fear. Some observers are calling for a market reversal due to the low VIX, but VIX is not the best market timing indicator.

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