Breakout

Contagion Creeps Into U.S. Market as Investors Turn Defensive

Breakout

By all accounts it has been an action-packed couple of weeks, starting with the day-to-day drama coming out of Cyprus, some big intraday swings by stocks, and most recently, a back-to-back punch of surprisingly weak housing and confidence data here at home.

While the broader market doesn't have a lot to show for it - either good or bad - a look within the benchmark S&P 500 index shows a creeping contagion has been building for the past ten days. Specifically, the sudden leadership of defensive sectors such as health care, telecom and consumer staples.

"The cyclicals are challenged right now from an earnings growth perspective," says Jeff Kleintop, chief market strategist at LPL Financial in the attached video. "So the defensives are probably going to have a better showing as we get into the heart of earnings season over the next couple of weeks."

Speaking of which, Alcoa's (AA) first quarter earnings will be released after the close of trading on Monday, April 8th, and it's 3-percent drop over the past 3 months has left it as the worst performing stock in the Dow Industrials. That counter-trend slump compares to a 10% gain for the Dow year-to-date, and is consistent with the sudden under-performance being seen in the Materials (IYM), Industrials (XLI), Financials (XLF) and Technology (XLK) sectors.

"When you want to get the market higher you typically need cyclicals to lead the way," Kleintop says.

In this case, the way higher would likely require the S&P to hit an all-time high, but Kleintop thinks a modest pullback of 5-10% is probably more likely, and definitely more constructive.

"It's been 130 days since we've seen a pull back of 5-10%... I'm afraid until we get one the markets are going to be challenged to go any higher," he says. "I am more worried about people buying at new highs and getting their fingers burned again."

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