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Sector Detector: Another Technical Breakout As Bulls Build Their Army

 March 15, 2012 11:22 AM

Well, the bulls took that minor pullback last week, and rather than wait for a test of support at the uptrend line, they jumped right in and brought a few more friends along for the ride. Rather than fearing that their run is over, bulls held their ground and found support from bears throwing in the towel (i.e., short-covering) as well as investors sitting on cash who just couldn't bear (pardon the pun) to watch the train leaving the station without them. Never has the phrase "Don't fight the Fed" been more predictive, particularly when the Fed is joined by virtually every other central bank in the world.

Look, I can't deny the dangers pointed out by the doomsayers. I absolutely can appreciate the view that the market (and the economy) has become a house-of-cards. It may well turn out that we have chosen to avoid enduring a little discomfort now in exchange for severe pain in the future. The eventual unwinding of the central bank balance sheets most likely won't be pretty.

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But for now, as long as the world remains awash in fiat currency, U.S. stock market fundamentals on balance look pretty good. I just have not seen any indications that a market crash scenario is imminent. My regular readers know that I have been in the bullish camp for quite awhile, dating back to last fall when the market was trying to break out of a long trading range with resistance around 1220 on the S&P 500. It closed Wednesday at 1391. Sabrient's SectorCast-ETF rankings of the 10 sector iShares have leaned cautiously bullish for quite several months, and the charts have been decidedly bullish. 

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I have been saying that a breakout through resistance levels of 13,000 on the Dow, 3,000 on the Nasdaq, and 2011 highs on the S&P 500 would be difficult without elevated volume, and that is what we got. Financial stocks led the way, which is quite important to the sustainability of the rally. Bank of America (BAC), JP Morgan (JPM), Wells Fargo (WFC) and others all broke out of technical patterns on huge volume. Technology, too, has been quite strong, and IYW continues to sit atop the Sabrient rankings, followed by Financial (IYF).

Speaking of Tech, I can't help but talk about Apple Inc. (AAPL) again this week. The stock was up another 4% on Wednesday on big volume. It was just last month that it crossed the $500 threshold, and now it is already approaching $600, as its new iPad 3 delights the world and sucks in more Apple converts and as analysts project huge growth in emerging markets. This is nearly a 50% gain year-to-date and 580% in the three years since the March 2009 market lows. For the largest market cap company in the world, such rapid appreciation is truly amazing. This company is a true leader in every sense of the word, including in the stock market.

From a historical standpoint, volume is still relatively light, but it jumped well above recent levels on this technical breakout, and that was all the bulls needed to attract reinforcements, build on their conviction, and chase away the bears. Now we watch for a possible pullback to test support at those former resistance levels.

Now that the breakout has occurred, I'm seeing lots of bullish headlines imploring us to get onboard the train and predicting targets like Dow 14,000 / 15,000 / 17,000. Even some of the formerly bearish or ultra-cautious commentators are throwing in the towel and switching sides (which worries me a bit). Besides Financials and Technology, they are suggesting buying gold miners, steel producers, oil, and oil producers.

Indeed, looking at the Sabrient quant models, it does appear that the Basic Materials stocks are undervalued. The IYM displays the lowest projected P/E among the 10 sector iShares, Sabrient's favorites in this space include Companhia Siderurgica Nacional (SID), Cliffs Natural Resources (CLF), Globe Specialty Metals (GSM), and Kronos Worldwide (KRO).

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