Looking for Market Leadership

In this election year, we hear a near-daily drumbeat about each candidate's leadership skills and ability to inspire confidence. While that's fine for political junkies, it makes us equity guys wonder where the leaders are in the stock market.

So far, none of the usual suspects has been able to take followers to the Promised Land: Citigroup (C - commentary - Cramer's Take), Merrill Lynch (MER - commentary - Cramer's Take), IBM (IBM - commentary - Cramer's Take), Intel (INTC - commentary - Cramer's Take) and 3M (MMM - commentary - Cramer's Take) have all failed to rise to the occasion. Who will step up?

The Mighty Have Fallen

Just like armies, markets require leadership to drive forward. The aborted bounces in March and May failed because there were no generals leading the troops into battle. Individual sectors bounced and then faded. From the October 2002 lows, several leadership groups have emerged and advanced, only to retreat:

Semiconductors, as measured by the Philadelphia Stock Exchange Semiconductor index, have nearly tripled, signaling the start of a new demand cycle for chips and flash memory.

The banking sector, as measured by the Philadelphia Stock Exchange/KBW Bank index, gained 50% as the housing and mortgage-writing businesses exploded. Since then, banks have faded to where they were at the start of the year.

After a huge move, the housing sector has gone sideways since October 2003.

The American Stock Exchange Broker/Dealer index has been forming a head-and-shoulders top. We can't expect any leadership here with both Merrill Lynch and Charles Schwab (SCH - commentary - Cramer's Take) making 52-week lows this week.

The American Stock Exchange Biotechnology index nearly doubled, but has since backed off its highs.

The more mature American Stock Exchange Pharmaceutical index, while in a healthy uptrend, is hardly burning up my screen. Big Pharma seems too distracted by the upcoming election to lead the markets higher.

With many of my reversal indicators lighting up green, I could become much more bullish if I could find a sector demonstrating the sort of market leadership that lasting rallies are made of. Of late, it's been only oil and basic materials, Internets and the defense sector picking up the baton. These aren't what typically get the job done.

Energy and commodities gains are almost counterproductive, as they often have the unpleasant side effect of sucking the air out of the room. Finite consumer dollars spent on energy cannot be spent in the retail sector. Material price increases are potentially inflationary, and most firms are finding they can barely pass along these increases to customers.

Internet stocks also remain in a strong uptrend, but since the bubble popped, they have been unable to assume a leadership role. Perhaps sobering memories of the immediate aftermath of the dot-com heyday have prevented them from becoming true market leaders.

The best looking, non-commodities sector remains defense. The Philadelphia Stock Exchange Defense index is near a 52-week high, having rallied from the start of the war in March 2003. Given how disconnected this sector is from the business cycle -- and how tied into geopolitical events it is -- we shouldn't expect it to exert much influence on the rest of the market.

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At the time of publication, Ritholtz was long Microsoft, although holdings can change at any time.

Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].