Although most investors focus on major indexes like the Dow Jones Industrial Average, S&P 500 and Nasdaq, much can be learned from a quick "look under the hood" at specific sectors that are on the move.
So far this year, significant strength has been seen in oil, health care, materials and utilities, and this action reflects what has thus far been a confusing period for the overall stock market.
Oil and materials are considered "growth" sectors because strength here is indicative of rising economic activity, while health care and utilities are considered "defensive" sectors and a place to go when "risk off" conditions prevail.
Now, however, as April showers give way to May flowers, we see a noticeable rotation toward growth sectors as investors regain confidence after April's early volatility.
Recent days have seen significant strength in the transportation sector as the Dow Jones Transportation Average set an all-time record high on April 22. Transportation, of course, reflects economic growth and activity as goods and people move around the world, and strength here is a bullish indication for the broader market.
Other areas showing increased signs of life are oil, gasoline and industrials.
Oil and gasoline have been in sharp uptrends even though the summer vacation and driving season are more than a month away. Gasoline prices are on the rise and oil prices have been supported by tensions in Ukraine and improving economic data.
Regarding the industrial sector, the Dow is on a renewed uptrend and within striking distance of its all-time high.
Looking farther around the sector landscape, technology and small caps, two of the hardest hit during the April sell-off, are also moving higher. These two are considered to be leading "risk on" sectors, and though they've started to climb, they still have! some distance to travel before again challenging all-time highs.
In spite of the bullishness, the utility sector is still showing strength over the past 30 days. This is a cautionary indication as money tends to leave this defensive sector during truly robust rallies. More weakness here would add credence to the bullish case for major U.S. indexes.
Overall, the April mini-correction turned the corner on April 11 and growth sectors and the major indexes have been showing notable strength since then. The next big test for U.S. markets lies at resistance levels marked by highs set on April 2 for the Dow Jones Industrial Average at 16, 573 and the S&P 500 at 1890.
A sustained breakout to new highs would set the stage for a further advance while another failure here would likely take the air out of the recent rally. As always, Mr. Market will tell us what he has in mind. For the moment, a "green flag" is flying in a favorable breeze for U.S. equities.
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