Stock Market Sector Strength Indicates Returning Confidence

By: Donald_W_Dony

Analysts and economists often refer to the strength or weakness in certain key industrial groups as evidence of a recovering or declining economy. During the recovery phase of a typical business cycle, there is usually greater buying emphasis on industry sectors that reflect a more optimistic stance. This wave of confidence can shift short-term to a more defensive approach.

For example, in the 2nd quarter, investors moved out of growth and risk and into safety with consumer staples and utilities. Concern for the strength of the economy was surfacing as the threat of a 'double dip' recession came forward. Analysts monitor these movements of buying pressure to provide information on investor sentiment and the economy.

Over the past three months, the top 10 performing industry groups provides a picture of a renewed confidence and underlying market strength.

The best performing industries are:

1) Travel & Tourism Index................................57.22%
2) Base Metals Index.......................................22.91%
3) Real Estate Services Index...........................22.32%
4) Tobacco Index.............................................21.04%
5) Commercial Vehicles Index...........................16.96%
6) Specialty Chemicals Index............................15.52%
7) Diversified REITS Index................................14.56%
8) Real Estate Investments Index......................13.96%
9) Platinum & Precious Metals Index...................13.59%
10) Telecommunications Index..........................13.58%

7-out-of-10 high performing sectors are associated with real estate, materials and consumer discretionaries.

Bottom line: Returning strength in real estate related indexes, materials and consumer cyclicals is a positive sign for equity markets as they approach the 4th quarter. This sector shift out of consumer staples and utilities and back into growth industries reinforces the outlook of an improving economic recovery and equity bull market.

Investment approach: Equity markets are currently overbought due to the sharp rally in early September. Investors may wish to wait one to two weeks before adding new positions to their portfolios.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2010 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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