Sector Detector: New Year brings new hope after bulls lose traction to close 2015

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Chart via Finviz

Courtesy of Sabrient Systems and Gradient Analytics

Last year, the S&P 500 large caps closed 2015 essentially flat on a total return basis, while the NASDAQ 100 showed a little better performance at +8.3% and the Russell 2000 small caps fell -5.9%. Overall, stocks disappointed even in the face of modest expectations, especially the small caps as market leadership was mostly limited to a handful of large and mega-cap darlings.

Notably, the full year chart for the S&P 500 looks very much like 2011. It got off to a good start, drifted sideways for a few months, threw everyone into a tizzy with a scary summer correction, found double-bottom support leading to a strong October rally, and then fell into a sideways consolidation for the last two months of the year. It’s deja vu. In both years, a sideways channel set the trading range most of the time, and without a strong catalyst, there simply wasn’t enough fuel to ignite a major breakout for either the bulls or the bears.

In contrast to 2015 ending as it did with a whimper, the first trading day of 2016 was downright scary (the worst opening day for the Dow Industrials in eight years) — as if to give fair warning of a more volatile year ahead. But higher volatility wouldn’t necessarily be a bad thing, as investors and corporations may be more inclined to allocate capital with an eye toward risk exposures, i.e., a flight to quality, including value, GARP (growth at a reasonable price), and dividend-paying stocks. We just might end up looking back on 2015 as a cautious year of transition out of the ZIRP era.

In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.

Market overview

Yes, U.S. stocks mostly disappointed investors last…
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