Strength in Cyclicals Suggests that the Market is Healthy

The Dow Transports and Consumer Discretionary names, specifically retailers, are making all-time highs. We cannot argue with price. Price is the truth. Price action tells us what the investors that really matter are doing with the money they need to put to work.

[caption id="attachment_3260" align="aligncenter" width="620" caption="S&P Retail Index"][/caption]

If you read the headlines, you would think that things out there are really bad: you got talk about debt ceilings, QE3, US Dollar getting crushed, European Train wrecks we call PIGS, Jobless Claims and Unemployment Rates, Municipalities in trouble.....the list goes on and on. The headlines suggest that the data is bad for stocks. The price action, however, paints a much different picture.

The Dow Jones Transportation Average made record highs last week. So did the S&P Retail Index. So did the overall S&P Consumer Discretionary Sector SPDR. Would these cyclical names be hitting record highs if this market was in that much trouble?

We discuss price here a lot on Allstarcharts because as they say, price is the ultimate arbiter. 

[caption id="attachment_3261" align="aligncenter" width="620" caption="S&P Consumer Discretionary Sector SPDR"][/caption]

[caption id="attachment_3262" align="aligncenter" width="620" caption="Dow Jones Transportation Average"][/caption]

These Cyclical areas of the market are showing strength. In addition, the relative strength, on top of this absolute performance cannot be dismissed. We want to watch for any weakness in these areas to warn us of more severe corrections.

Happy Friday