Sector Detector: Bullish conviction returns, but market likely to consolidate its V-bottom

October 27, 2014 at 07:49 AM EDT

Courtesy of Sabrient Systems and Gradient Analytics Bulls showed renewed backbone last week and drew a line in the sand for the bears, buying with gusto into weakness as I suggested they would. After all, this was the buying opportunity they had been waiting for. As if on cue, the start of the World Series launched the rapid market reversal and recovery. However, there is little chance that the rally will go straight up. Volatility is back, and I would look for prices to consolidate at this level before making an attempt to go higher. I still question whether the S&P 500 will ultimately achieve a new high before year end. 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: I am in NYC this weekend between trips and visiting my daughter at college, so I’ll keep this short. After some profit protection kicked into gear in the face of an exaggerated Black Swan scare around Ebola, along with all the other usual worries about slowing global growth and terrorism (and the delta-hedge short selling associated with options expiration), investors finally came to their senses. The S&P 500 enjoyed its biggest week of the year (+4.1%), and yet active investment managers (including hedge funds) are now underinvested after dumping shares during the selloff. As I said in last week’s article, investing is about stacking the odds in your favor, and the more severe technical conditions become, the greater the odds of a bounce or outright reversal. So far, it appears that a classic V-bottom reversal scenario is trying to play out. But I seriously doubt it will be party time again for the more speculative names. A high-quality balance sheet has become very important. New market psychology has set the stage for lower equity correlations, selective stock picking, and capital flight to the highest quality companies, i.e., those with strong market position, solid cash flow, and low debt levels. Energy had been by far the worst performing sector for the October (as of mid-month), but the sector got…

Courtesy of Sabrient Systems and Gradient Analytics

Bulls showed renewed backbone last week and drew a line in the sand for the bears, buying with gusto into weakness as I suggested they would. After all, this was the buying opportunity they had been waiting for. As if on cue, the start of the World Series launched the rapid market reversal and recovery. However, there is little chance that the rally will go straight up. Volatility is back, and I would look for prices to consolidate at this level before making an attempt to go higher. I still question whether the S&P 500 will ultimately achieve a new high before year end.

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:

I am in NYC this weekend between trips and visiting my daughter at college, so I’ll keep this short. After some profit protection kicked into gear in the face of an exaggerated Black Swan scare around Ebola, along with all the other usual worries about slowing global growth and terrorism (and the delta-hedge short selling associated with options expiration), investors finally came to their senses. The S&P 500 enjoyed its biggest week of the year (+4.1%), and yet active investment managers (including hedge funds) are now underinvested after dumping shares during the selloff.

As I said in last week’s article, investing is about stacking the odds in your favor, and the more severe technical conditions become, the greater the odds of a bounce or outright reversal. So far, it appears that a classic V-bottom reversal scenario is trying to play out.

But I seriously doubt it will be party time again for the more speculative names. A high-quality balance sheet has become very important. New market psychology has set the stage for lower equity correlations, selective stock picking, and capital flight to the highest quality companies, i.e., those with strong market position, solid cash flow, and low debt levels.

Energy had been by far the worst performing sector for the October (as of mid-month), but the sector got…