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Knowing that financials tend to hold the key to whether a rally is sustainable, it's impossible to ignore the long-term resistance area that the Dow Jones US Financial Index is now testing. Failure to break resistance will seriously impact the stock market's performance both in the short-term and the long-term. But a breakout would add another layer of bullishness to recent rally. Therefore, we see nothing more important than how the market reacts to this MAJOR long-term test of resistance. Check this out: 
Serious resistance remains for the Dow Jones U.S. Financial Index, as reflected in the above chart. If you remain with a bearish stance, you DO NOT want to see the price resistance AND key moving averages taken out as that will likely trigger strong inflows of capital as technical buyers jump on board. We cannot overlook the strong relative performance in the more aggressive indices vs. defensive ones. The NASDAQ and Russell 2000 are dominating the Dow Jones and S&P 500 in 2012, reflecting an improving appetite for riskier investments, a necessary component to a healthy and sustainable rally. In addition, take a quick glance at the distribution of gains amongst sectors so far in 2012: Basic materials (aggressive) +10.99% Financials (aggressive) +8.69% Industrials (aggressive) +8.03% Utilities (defensive) -3.47% Consumer staples (defensive) -0.83% For those who'd rather see a visual of this change in investor mentality and behavior, look at how consumer discretionary (aggressive) is performing relative to consumer staples (defensive): 
Earlier in the year, one of our concerns about the stock market in 2012 centered around the inability for this relative ratio to breakout above the relative high in October. We've yet to see this breakout, but we have tested relative resistance. If you're looking for further confirmation of this rally being sustainable, keep an eye out for a relative breakout here. This ratio moves higher when the XLY (consumer discretionary) outperforms the XLP (consumer staples). It provides us an "under the surface" type of message to analyze the strength and sustainability of a rally. Understand what a relative breakout means. In the week ahead, the big news story will once again be jobs. On Wednesday, the ADP Employment Change report hits the Street with expectations of 175,000 jobs. The 1-2 punch ends on Friday when the more closely watched government Nonfarm Payrolls report is released. Consensus estimates call for 170,000 jobs. And always keep in mind that the news is just half the story. The technical REACTION to the news is far more important in our opinion. Last week, the stock market managed to move higher despite weak economic data. That is the hallmark of a bull market. Currently, the technical indicators suggest we're in the midst of a very strong 2012 stock market. Don't let the talking heads sway your thinking. Watch the numbers, the critical levels. Remain focused on the relative performance of financial stocks, particularly banks. Also keep an eye on the relative strength of discretionary stocks vs. staples stocks. These are the things that matter -- not whether Jim Cramer chews the head off of a bear. Happy trading! |
