With the October jobs report now in the books, the market finds itself in a middle ground between the recent flood of macroeconomic news and the earnings season that’s still to come. But that doesn’t mean the next few weeks will lack for excitement.
Right now, four major sectors — energy, materials, industrials and financials — are sitting close to make-or-break technical levels. The direction they take from here just might provide the key to the fourth-quarter outlook for the broader market.
The tale told by the charts of the major indices is almost uniformly positive: The Dow Industrials, S&P 500, NASDAQ 100 and Russell 2000 Index have all moved out above their previous highs of the spring, and — so far — have held those levels on the post-QE3 “sell the news” profit-taking.
However, the energy, materials, and industrials sectors haven’t yet exceeded their previous highs, while financials haven’t done so in a convincing fashion. This is telling in that the sectors that make up the economically sensitive core of the market have not yet joined the headline indices into breakout territory.
Let’s start with financials, since that’s the largest of the four and arguably the most important. Last month, Select Sector SPDR-Financials (NYSE:XLF) rose above its previous high of $16, fell back and has since retaken that level. The ETF now trades between its September intraday high of $16.44 and its 50-day moving average at $15.30.
Watch these levels as a key indicator of broader market health. Fortunately, the story told by this chart is positive, with the three major moving averages (20-day, 50-day and 200-day) trading in a bullish order and all trending upward. In addition, the technical picture for the two major components of the financial sector — Wells Fargo (NYSE:WFC) and Berkshire Hathaway (NYSE:BKR.B) — are both very favorable.
The story is similar for the cylical sectors, as measured by the Select Sector SPDR-Energy (NYSE:XLE), Select Sector SPDR-Industrials (NYSE:XLI) and Select Sector SPDR-Materials (NYSE:XLB) ETFs. While the three groups each have smaller weightings in the S&P 500 than financials’ 14.8% — at 11.1%, 9.8% and 3.5%, respectively — together they provide insight into the outlook for global economic strength.
Right now, energy and materials remain short of their spring peaks after briefly moving into new high ground during September, while industrials touched the previous high but never broke through. As is the case with financials, all three are trading in a close range between their previous intraday highs and 50-day moving averages:
|Previous High||50-Day MA|
Another similarity between these three charts and XLF’s is the presence of a bullish ordering of the three moving averages, with all showing an uptrend.
While these charts are generally showing a positive story for now, it’s important to keep in mind that the potential for external risk factors coming into play remains high. Although central bank policy is more supportive than at any time in history, Europe’s debt crisis, the situation in the Middle East, the U.S. elections and the federal government’s “fiscal cliff” are all issues that could upset the apple cart in the coming weeks.
So, watch the key levels on these ETFs for a potential early warning on which side — fear or greed — is going to prevail in this tug-of-war.