Performance divergences, especially in key industry sectors, are
either supportive or non-supportive of the broader stock market's
Although the S&P 500 (SNP:^GSPC) and Dow Jones Industrial
Average (NYSEARCA:DIA) have notched new highs this year, small cap
stock ETFs linked to the Russell 2000 (NYSEARCA:IWM) and S&P
SmallCap 600 (NYSEARCA:IJR) continue to lag. The fact that higher
beta/higher risk small cap stocks aren't leading the rally means
that investor risk appetite is on pause mode. Is a sharper
reduction in risk taking ahead?
Ron DeLegge Grades a $480,000 Investment
Along with lagging small caps, stocks in the homebuilding
(NYSEARCA:ITB), retailing (NYSEARCA:XRT), and regional bank
(NYSEARCA:KRE) industry sectors have not participated in the 2014
rally to new highs. The chart below shows how all three sectors are
posting negative YTD performance compared to a gain for the S&P
500. Should it be cause for concern?
It would be a genuine mistake to discount the significance of
homebuilders, retailers, and regional banks along with their lack
of participation in the equity market's rally to all-time
Consumer spending (NYSEARCA:XLY) accounts for roughly two-thirds
of national GDP and the performance of housing is central to any
economy that's purportedly "growing." Regional banks are heavily
represented in the small-cap finance portion of the Russell 2000
(almost 25% sector exposure) and give us a sharper glimpse of
economic vibrancy at a localized level.
For Q1, the U.S. GDP was revised downwardly from +0.1% to -1%.
Not only are these three sectors important to the broader U.S.
economy, but they are vital to the broader stock market.
If homebuilders, retailers, and regional banks are unable to
breakout of their funk of subpar relative performance, it could
spell trouble for the rest of the equity market. Weak performing
sectors often get weaker when the stock market starts to falter.
And that's why these particular sectors could hold the key to stock
market performance in the coming months.
Profit Strategy Newsletter
uses technical and fundamental analysis along with market history
and common sense to keep investors on the right side of the market.
We cover major asset classes like stocks, bonds, and gold. In 2013,
70% of our weekly ETF picks were winners.
Follow us on Twittter @