Markets Require Leadership To Rise

I think the title might seem rather elementary, but nothing in market analysis is really too complex. When the market is rising with great breadth and broad participation it tends to be longer-lasting and stable.

Recall that post-election we witnessed some amazing rally days, with very strong market breadth and equally strong turnover. Those basics—a market rallying on higher volume and participation—can lead to higher prices.  

Of course, nothing is a guarantee. We follow trends and patterns that repeat over and over again, but lately some of the best names that have been leading the market since the election have fallen sharply.

Witness the banks/financials, which have faltered badly since the recent Fed action (rise in short term rates).  Many believed that hike might help banks. But when rates on the long end of the curve headed lower, that flattened out the yield curve, and banks become less attractive in that environment.  

Concerning as well is that commodity names have been hit hard of late and strong days have not followed up with any conviction. With crude oil getting hammered, there are related groups that continue under distribution (selling). Tech and biotechs have been safe havens, but those groups cannot push markets up forever. Transportation stocks have come under significant pressure, breaking support levels in short order and homebuilders have declined sharply as a group.

As we move into the new quarter next week, we'll have to be mindful of which groups lead and which ones lag. The markets will take the cue from the leaders who participate. If the groups that lead growth and expansion in markets show leadership with broad expansion we could see that next leg higher starting the new quarter. However, a lack of sponsorship from leading names may cause market participants to take a pause.