The right stuff: Bullish sectors now buoying stocks

Stocks being powered by 'the right stuff'   

All of the sudden, the market appears to have the right stuff.

After a year in which the defensive utilities led the pack, classical bull-market sectors like consumer discretionary, information technology and more recently the financials have begun to show some strength. This could be an indication that recent allocation to stocks is being driven by excitement over the economy—and it's certainly making bulls more enthusiastic about the strength of the rally.

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"This is the right leadership," commented Ari Wald, head of technical analysis at Oppenheimer. "We think this is a sign that investors are embracing risk. That's a sign of a healthy advance. And we think it suggests that the S&P 500 ultimately makes new highs."

A scene from the movie "The Right Stuff."
Source: Warner Bros. Pictures
A scene from the movie "The Right Stuff."

Of course, out of the 10 sectors in the S&P 500, some must lead and some must lag in any given year. Wald's point is that the information about which sectors are leading actually sheds some light on how investors feel about the market as a whole.

For instance, the financial sector tends to enjoy the highest correlation with the entirety of the S&P 500 (which is why the SPDR financial sector ETF, XLF, has a beta of 1.3, indicating that it tracks the S&P on more than a one-to-one basis).

Financial stocks have been lagging the market over the past several years. But the sector's market-leading 2.1 percent rise in the early days of June could indicate that investors are finally changing their tune.

"If there's one area you want to lead, it's the financials," commented Frank Cappelleri, executive director of institutional sales and trading at Nomura equities execution firm Instinet. "They have one of the highest weights, and heaviest influence, of any sector."

Similarly, the consumer discretionary sector has now started to dominate consumer staples, which is another indication that investors are being more comfortable with taking on cyclical risk. In other words, investors seems to finally be playing for the economic cycle to swing into higher gear.

If those investors are right, then the outlook for the S&P as a whole may look bright indeed.

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