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Riskier Assets Take the Lead Making a Case for Stronger Gains

David Becker
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www.iforex.com

The stock market stepped it up another gear with big gains and new highs in the first week of July. Most of the major index ETFs recorded new highs this month already. The Russell 2000 iShares (IWM) hit an intraday new high last week and remains close to its March high. The Russell MicroCap iShares (IWC) is the laggard because it has yet to reach its March high. Even though IWM is at its high and IWC is below its high, both led the market higher over the past week and the past month. Mid-caps, small-caps and micro-caps are the clear leaders. This reflects a healthy appetite for risk in the stock market. Renewed leadership in these riskier groups bodes well for the stock market and the economy.

The relative weakness in the consumer discretionary sector was a concern a month ago, but not anymore. The Consumer Discretionary SPDR (XLY), Technology SPDR (XLK), Energy SPDR (XLE) and HealthCare SPDR (XLV) have been leading since June 3rd. XLY came to life this past week with a new 52-week high and a gain that was greater than that of the S&P 500. It is quite positive to see these two sectors leading the stock market.

The consumer discretionary sector is the most economically sensitive sector and relative strength is a positive sign for the economy. The technology sector is also an important barometer because it has the stocks with the highest betas. This means the tech sector represents the appetite for risk and a healthy appetite for risk bodes well for stocks. In contrast to these offensive sectors, notice that consumer staples and utilities, which are defensive sectors, were the weakest. This indicates that money is moving from defense to offense. Momentum on the XLY is strong with the MACD generating a buy signal.

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