The market forecast is decidedly mixed, with some indicators being bullish and others being bearish. At least one measure of breadth looks positive. Clay Allen, CFA, reports that the NASDAQ 100 is the best performer on that basis, and defensive high yield stocks are the laggards:

% of Stocks Above their 50-d Moving Average

S&P 500

58%

S&P 400

59%

S&P 600

55%

NASDAQ 100

70%

High Volatility

58%

High Yield

46%

source: clayallen.com

Looking at sectors, we see 4 sectors with a majority of stocks moving higher, but 6 show a majority of stocks with bearish trends. For this view, we are looking at the Bullish Percent Index (BPI) from StockCharts.com. This indicator that is calculated by dividing the number of stocks in a given group that are currently trading with Point and Figure buy signals, by the total number of stocks in that group. This measure of market breadth indicates that the losers from the first part of the year are now investor favorites.

Finance

61.73

Consumer Discretionary

59.62

Energy

54.95

Info Tech

54.22

Materials

42.70

Telecom

40.00

Healthcare

35.93

Industrial

33.33

Consumer Staples

32.47

Utilities

12.68

Looking at sectors since the rally began offers some additional insights into the current state of the market. For the most part, we see that the sectors that were losers in the decline have been leaders on the way up.

Decline

Since March Lows

(Rally rank)

Finance

-48%

+55% (1)

Industrial

-31%

+30% (3)

Consumer Discretionary

-24%

+27% (4)

Utilities

-19%

+15% (7)

Materials

-17%

+32% (2)

Consumer Staples

-17%

+12% (8)

Energy

-15%

+17% (6)

Technology

-15%

+21% (5)

Healthcare

-15%

+12% (8)

S&P 500

-26%

+21%

Putting it all together, we get a market that may be pointing towards economic recovery. If the market is discounting the future, leadership from financials, material and industrial stocks points towards increased economic activity. However, usually at the end of a bear market, we would expect to see technology socks providing leadership as investor optimism returns.

The recent rally seems more like bottom fishing than a sustained bull run. The ultimate bottom may be in, but sector rotation is likely to be the dominant theme in coming weeks as the market builds a base after the deep decline it suffered since last fall.