Looking Under the 'Hood' of the Market

Since peaking about a month ago, the S&P 500 (SPX) has given back about 12%; however, as I continue to look ‘under the hood’ of the market, there have been some interesting developments from a relative strength (RS) perspective.

Today, there are 13 out of the 40 US economic sectors that have a higher RS reading than on April 23rd. By the way, 38 out of the 40 economic sectors produced positive returns last year (2009) and certainly, some sectors did better than others, but simply being in the market produced attractive returns. However, as we are now five months into 2010 it is becoming more and more apparent that having a tactical sector rotation strategy is going to be extremely important going forward. So far, there are 22 out of the 40 sectors which have produced positive returns this year. In other words, without a disciplined strategy you had roughly a 50 / 50 chance at picking a winning sector this year.

The correction for the vast majority of strong relative strength names has been just that - a correction, many investments are still in positive trends with strong technical attributes.
While volatility can wreck havoc on an investor's psyche, it is also the reason why equity returns are higher than returns on more stable assets like CD's.

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