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Over the last month the stock market has been incredibly strong. The market sectors currently at upside extremes are Health Care and Utilities. Extremes on the downside over the last month are close to being made in the Energy and Telecoms sectors.

As can be seen from the above chart, the trend of the 2 strongest and 2 weakest sectors over the last month was extended last week. Companies in these sectors are worth watching for potential reversals, however given the strength of the market it may be risky looking for shorts here.

It may be more worthwhile looking for opportunity in the Energy and Telecoms Sectors, given their extreme weakness recently relative to the overall market strength. Add to this the fact that they are both going to be starting the week off at support levels that have proved to be important over the last month:

The following correlation cluster chart shows the 10 major sector ETF's along with 5 companies per sector which are highly correlated to that sector. This illustrates which sectors have been behaving independently over the last month and which have simply followed the herd. The majority of the market has been correlated with the Financial sector with the exception of Utilities.

Final Thoughts

Sectors to watch this week:

  • Health Care
  • Utilities
  • Energy
  • Telecoms

It would be worth looking for relative strength/weakness from companies within those sectors, or simply looking for opportunity in their respective ETF's. Be careful of having too many positions in the Financials or sectors highly correlated to the Financials. Diversifying into uncorrelated sectors will reduce your overall portfolio risk.

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