Although stocks ended higher on Friday, a distinct divergence has entered the market. The health of the Nasdaq is in question as semiconductor and other tech stocks are on the cusp of losing support. Further, sector rotation is apparent. As technology and homebuilder stocks are getting hit hard, oil, emerging market and pharma/biotech stocks are rallying. Money is churning around the market at the expense broad based participation. The S&P MidCap 400 led all indices, as it posted a 0.7% gain on Friday. The small-cap Russell 2000, S&P 500 (NYSE:SPY) and Dow Jones Industrial Average (NYSE:DIA) all closed higher by 0.5%. The Nasdaq was the day’s laggard as it struggled to finish up by 0.3% on the day. It is also noteworthy that the Nasdaq and the S&P 500 closed in the bottom half of their intraday ranges.
Turnover ended the session mixed. Volume was up by 11.2% on the Nasdaq but down by 6.6% on the NYSE. While the NYSE saw advancing volume outperform declining volume by a ratio of 2.8 to 1, the Nasdaq saw declining volume move fractionally higher than advancing volume. Friday’s price action and market internals support the presence of sector rotation.
Below are eight ETF charts. Upon review of these charts it appears as if sector rotation is in full force. The semiconductors (NYSE:SMH), technology (NYSE:TYH), homebuilders (NYSE:ITB) and networking (NYSE:IGN) are all showing signs of distribution. On the other hand money is flowing into crude oil (NYSE:OIL), biotechnology (NYSE:IBB), medical devices (NYSE:IHI) and emerging markets (NYSE:EDC). Over the past several trading days the divergence among these ETFs provides reasonably clear evidence of sector rotation.
Money is rotating out of the following ETFs:
While money is moving into these ETF groups:
If the market sells off this week, the Nasdaq could very well lose its 50-day MA. Since the Nasdaq is generally a leading market indicator, this could result in a broad market pullback for several days. However, it is also possible that we continue to see both strong and weak sectors, thereby providing opportunities on both sides of the market, while the market consolidates.
Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to: [email protected]