The stock market is defensive but with strength under the covers

The stock market retreated when it got close to its previous high in late November. The DOW was flat, the S&P lost 0.3% and The Nasdaq Composite lost 0.9%. Contrast the big strong bullish bars on December 17 and 18 with those that followed. Some of these succeeding bars had volume that was much larger than it was on either the 17th or 18th, but their ranges were tiny. That is a lot of effort (i.e., volume) for little or no result (i.e., price). When the market could not go higher because of insufficient demand, it fell. But the drop on Thursday and Friday was also lacking in resolve. The bottom line is that this is a sluggish bull market; it will have to drop much further to switch over to a bear market.

My chart of cyclicals divided by consumer staples shows the cyclicals steaming ahead over the last week. (To see this chart, click on “Market Sector Table”). This creates a bullish divergence to the stock market which fell during the same period. My table of relative strength stock sectors shows positive turnarounds in the Automobile, Leisure, Building and Retail sectors over the past week or two. Strength was also seen in the Transportation and Semiconductor sectors. The defensiveness of the stock market is paralleled with the big gain in the Utilities sector. Continuing weakness in the energy sector helps the economy due to lower costs.

Here’s the relative strength chart of the Automobile sector:auto

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