S&P 500-resistance at 803.51(50day moving average)

While a decline in the markets to their March lows or even lower is still in the cards, various segments of the market may not reach their prior lows as the next market leaders begin to assert themselves. We are already seeing this with energy, materials, technology, and the health care sectors which are outperforming the S&P 500. When the market eventually bottoms these sectors are likely to continue as market leaders, holding their relative outperformance.

The market is over extended in the short term and has failed at initial resistance in the 800-805 range on the S&P 500 and is due for a short-term pull back. It will be interesting to see how far the market pulls back or if it can even continue higher. With either case, the above mentioned sectors should be monitored closely as they are likely to remain future market leaders.

It is too soon to say whether March represented “THE” lows for the bear market. My personal gut tells me no, and I will highlight some developments next week that cause me to lean towards a retest of the prior lows at a minimum with new lows still possible. In the interim, it appears the March lows due represent an intermediate low and the message of the markets needs to be respected. The S&P 500 met resistance at the 50d MA (803.51) and was stopped dead in its tracks, with the 50% Fibonacci retracement of the January highs at 804.29 also acting as resistance.

Whether the market continues northward or takes a few steps back before heading higher, it appears that the rally has underlining strength to it and will likely break through the 800-805 resistance on the S&P 500 over the next couple of months. Some key signs to watch for health to the current rally would be a breakout in key areas. Three ratios to watch closely are relative strength (RS) ratios of the Homebuilder Index and Retail Index relative to the S&P 500, as well as the relative strength ratio of the consumer discretionary sector to the consumer staples sector. The Retail Index RS ratio has already broken out with the Homebuilder Index RS approaching a fifth retest of its declining trend line, while the Consumer Discretionary to Consumer Staples RS ratio is close to another retest of its declining trend line. If all three ratios breakout from their bearish trends the market will be sending us a clear message that the worst is likely behind us in terms of what the market is discounting.