Since the follow through day on February 17, 2016, the major indices have made solid gains. The Nasdaq, S&P 500, and the Russell 2000 have all overtaken their 50-day moving averages and are aiming for their longer term 200-day moving averages. While performance in the indexes has been impressive, breakouts by growth stocks have been scant, and the industry group picture is quite bleak.

For example, looking at the top 10 industry groups in the MarketSmith database, five of the top 10 are either food- or utility-related. Many of the leading growth groups of the last few years, such as medical-biotech, cyber security, and internet-content have moved down in the ranks. This rotation is telling. Food and utility groups are typically identified as defensive because they are the low-volatility stocks in which institutional investors seek safety during difficult periods in the market. Since most institutional investors cannot short, they do the next best thing and move their capital to these groups to preserve capital. Earnings usually remain stable for food and utilities because demand for these goods remains constant, even during tough economic periods.

To achieve a sustainable rally, we will need to see industry group leadership transition out of defensive groups and into more growth-oriented ones. Remember that bull markets have a foundation of earnings growth and are driven by new and innovative companies. We can’t predict when this rotation will occur, but it is imperative to continue monitoring industry group action for signs of a shift, as well as the day-to-day action on the major indices.

Best Returns,

Andrew Rocco,

The MarketSmith Team