Stock market leadership points to risk aversion

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As far as leadership since the start of the nascent US stock market correction on January 20 is concerned, it is interesting that cyclical sectors such as the Materials SPDR (XLB), Financial SPDR (XLF), Energy SPDR (XLE) and Technology SPDR (XLI) have been leading the market lower. Traditionally defensive sectors such as Consumer Staples SPDR (XLP), Utilities SPDR (XLU) and Health Care SPDR (XLV) also declined, but to a lesser extent than the S&P 500 Index as a whole (-5.1%) and the cyclical sectors.

This is the type of pattern one would expect typically to emerge during a correction phase.

leadership270110

Source: StockCharts.com

Turning to the broader market, Adam Hewison (INO.com) provides a short technical analysis and poses the question “Is the Dow in trouble?” Click here to access the presentation.

The final words go to David Fuller (Fullermoney) commenting as follows from across the pond: “Why might this be no more than another correction rather than the beginning of a new bear trend? Unless the modest global economic recovery is about to slide back into another slump, which I doubt, I do not see the catalysts for another stock market collapse. Instead, and despite the current uncertainty, I think this could still be an economic sweet spot for stock markets characterized by modest global GDP growth, reasonably accommodative monetary policy and generally low inflationary pressures.

“Yes, there has been some overheating in emerging Asia, especially China where the PRC’s monetary authorities have moved early and incrementally to contain this problem, as I have said before. In North America and Europe central banks are talking about ending quantitative easing but that is not the same as a monetary squeeze. Historically, the US stock market has usually continued to rise during the early stages of a cycle of higher short-term interest rates from the Fed, and this has yet to commence.”

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