The stock market recovered from its correction with a powerful rally

The stock market roared back from its early October fall. The DOW, S&P 500, and the Nasdaq Composite had dropped through the bottoms of their bullish trend channels. The subsequent advance took the indexes from below their trend channels to the top. This doesn’t mean that they will, necessarily, drop. They could continue to move up along the top of their trend channels. Nevertheless, the stock market as a whole is bullish.

My table of relative-strength stock market sectors shows big losses in the Energy, Basic Materials and Leisure Sectors. As a whole, these losses mask strength in the rest of the Cyclicals Group. Let’s look at the individual implications of these three drops: the drop in Energy mirrors the nation-wide drop in gasoline and heating oil costs. This is undeniably bullish for the economy as almost everyone has more cash as a result. The recent drop in Basic Materials is part of a much longer-term drop lasting for more than a year. How can the prices of the inputs to manufacturing continue to sink when the economy is supposedly growing? The economy does not seem to be growing fast enough to support price increases. The drop in the Leisure Sector should be looked at in comparison to big gains in the Real Estate, Transportation, Computer Software and Bio Technology Sectors. This drop in the Leisure sector is probably just a matter of rotation to other sectors.

Here’s the relative strength chart of the Energy Sector:energy


Here’s the relative strength chart of the Bio Technology Sector:pharma


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