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Sector Detector: Awaiting The Next Catalyst

 March 22, 2012 10:33 AM

After last week's technical breakout on elevated volume, stocks have flattened and trading volume has waned as investors seem to be waiting to see whether there will be a pullback to test new support levels and the bulls' conviction. I think the bulls are plenty convicted—not conflicted.

New round-number resistance-turned-support levels are at 13,000 on the Dow, 3,000 on the Nasdaq, and 1400 on the S&P 500. The S&P was the last to breakout and the first to test support. In fact, it has been testing support at 1400 every day since it broke out last Thursday. So far this week, there has been little movement in any asset class as investors hold their positions and wait for the next catalyst. Gold, oil, and the U.S. dollar are all slightly down, 20-year Treasuries are slightly up, and stocks and the U.S. dollar are mostly flat. But the fact remains that there is little incentive to invest in low-yielding Treasuries right now.

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Among the ten U.S. sector iShares, Consumer Goods (IYC) has been the strongest this week through Wednesday, up about +1%, followed by Technology (IYW), Telecom (IYZ), and Consumer Goods (IYK), while Energy (IYE) has been the decisive laggard, down about -2%. The big leader of last week's technical breakout was the Financial sector, and IYF still displays the best overall performance since then.

With banks standing on firmer footing, the Fed is now allowing those that pass their "stress test" to boost dividends and buy back stock. And they are doing so. Some like Citigroup (C) and Sun Trust Bank (STI) have not yet passed the test, but others like Bank of America (BAC), Wells Fargo (WFC), U.S. Bancorp (USB), and JP Morgan (JPM) are getting aggressive.

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Again, I just can't help but say something about Apple Inc. (AAPL) this week. It was just two months ago that I was talking about AAPL finally pulling back into a tie with Exxon Mobil in the largest-market-cap sweepstakes. Now the comparison is a distant memory as XOM has stayed flat at a little over $400 billion while Apple has soared 35% in two months to reach a market cap of over $560 billion.

As I pointed out last week, the "junk rally" phase we have been in might be foretelling an imminent pullback to "re-rationalize," if you will. Higher quality stocks have been underperforming those that were beaten down or have high short interest. But quality will inevitably rise again.

Looking at the SPY chart, it closed Wednesday at 140.21. Last week, it blasted through resistance at 140 for the first time since mid-2008. It now finds itself right in the middle of its up-sloping channel that has been forming since late-December, with resistance around 142 and near-term support around 138. Below that, there is support from the longer-term uptrend line around 135, which also coincides with the rising 50-day simple moving average.

RSI, MACD, and Slow Stochastic are all pointed as if they want to cycle back down to oversold territory. But bulls might insist on churning in place to work off the short-term overbought conditions rather than pull back with any significance. Eventually, price will test its 50DMA for support, but it doesn't have to happen anytime soon.

The VIX (CBOE Market Volatility Index—a.k.a. "fear gauge") closed Wednesday at 15.13, which is just about exactly where it was last Wednesday, and it is comfortably below the important 20 threshold. In fact, it has remained in a range of 14-16 since the Dow and Nasdaq breakouts last Tuesday.

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