Watching the equity market leadership groups

Each bull market has its own singular leadership stocks or sectors: in the 1980's and 1990's it was technology, financial services and healthcare for sure, particularly large-cap pharma within healthcare during the 1980's and 1990's, but since March of 2000, or rather since March, 2003, the energy, basic materials, telecom and utility sectors have been the market leadership groups, and of those 4 groups, energy, basic materials and utilities have led the way.

With this morning's weak August jobs report of 4,000 jobs being lost by the economy, and the sharp downward revisions to job growth in June and July, it is very clear that we will get a set of fed funds rate reductions as Chairman Bernanke and the Fed will prevent the economy from sinking deeper into a recession.

The market keys for us will be how the former leadership groups act: of the above-mentioned 4 groups, energy continues to look the best technically as the XLE (energy sector ETF), and XOM have consolidated 2007 gains and look to be on the verge of breaking out again, if the price of a barrel of crude oil can move above $78. As a percentage of the S&P 500, energy's earnings weight is 14% of the S&P 500, while the sector's price weight is about 10%.

Utilities, telecom and basic materials each represent about 3% - 4% of the S&P 500 by earnings weight and market cap, and of the 3 groups, basic materials looks to be in the best shape, since precious metals are about half the weighting within the sector, and gold has broken out above $700 on the prospects for easier Fed monetary policy.

Utility action will be contingent on what happens with the TXU deal: I do think a lot of these private equity deals will get done as we move into the fall '07 since an easier Fed will loosen credit spreads and give us a chance to have a normally-shaped yield curve, both of which will restore some stability and sanity to credit and fixed-income markets.

To conclude, watch the market leadership groups for changes therein: the laggards of the last three years have been technology, financials, and consumer staples (the mainstay's of consumer staples being housing and auto's, not exactly two growth groups), and these three sectors comprise about 50% of the S&P 500 by earnings weight and market cap.

Thus, the sector leadership within the S&P 500 is coming from the smallest sectors within the index, which isn't a bad thing, it is just unusual. Financials represent almost 27% of the S&P 500 by earnings weight in and of itself. An easier Fed with a yield curve that is normally sloped can be earnings nirvana for the financial sector.

position in most/all sectors mentioned above