The majority of the public, including some professionals, obsess over the action of the popular averages of the Dow Jones or the S&P in order to gauge market health. It should be clear that these measures are only barometers of stock market activity, they don’t provide enough detail to reveal many underlying sectors. After all, using only 30 stocks in the Dow Jones to measure the activity of an entire economy is only a very crude gauge.

Recent market activity has been dominated by concerns over the Covid issues that have roiled many sectors of the economy. We know that the ‘stay at home’ stocks have done particularly well. We refer to AMZN, NFLX, ZM, PTON, SQ and the like, all of which have benefitted greatly from the ‘prisoner’ economy.

If you were to only follow the popular news and were convinced by their narrative that the economy was precarious and that uncertainty would prevail until a political resolution was clear after the November U.S. elections, you would not have noticed that very quietly, many economically sensitive sectors had been discounting a very bullish outlook for the past few months.

In earlier articles, we discussed the ongoing strength in the consumer discretionary sectors as well as the materials group. Strong economic activity will be reflected in positive price movement in those groups. Add to this, the activity in the homebuilding and construction group and we see a picture which is anything but nervous. The chart showing the consumer discretionary basket indicates a coiling or basing which I expect to resolve decisively to the upside. The chart below plots the consumer discretionary group (XLY) versus the popular market measures. We can observe that this group has lagged only the tech heavy Nasdaq in strength over the past year.

If we drill down again and look for the strongest constituents of this group, it’s clear that homebuilders and construction related stocks are the leaders, many trading at all time highs, TOL, HOV, DHI and PHM to name some of the larger cap issues. In addition, LOW and HD have been stable and also appear ready for the next leg up. Heck, just rebuilding Seattle, Portland and Minneapolis should keep those guys busy for many quarters to come!

By paying attention to relative strength measures, traders can discern the best sectors to be looking at in broad markets. Objectively observing the strong sectors will insulate traders from the misleading rhetoric that passes as news. Technical analysis is about what investors do, not what they say.

I wish to re-iterate a point that has been made many times before and that is that trends, once established, tend to continue until the underlying fundamental reasons for them to continue deteriorates. Any sudden sharp move against a long established trend is usually an actionable opportunity.