Technical Outlook: Watch for New Leaders

The frustrating thing about this market is the lack of a clear direction in growth sectors.

When stocks do rally, volume has been lower than normal, and that's not what you want to see coming out of a bear market. Eventually, the market will turn, and when it does, we will certainly see new leadership develop and fundamentally strong stocks break out of solid bases to confirm the move.

However, the leaders from the prior bull market won't be the ones at the forefront of the new uptrend. Too many investors look for their previous winners to come back and take the lead again, and that diverts their attention from the new leadership until it's too late.

Leadership often develops out of the least-expected areas, and the only way to recognize it is to keep a close eye on sectors that are basing and holding up better than the overall market during the downswings.

Also pay attention to beaten-down sectors that stop declining even with negative news. This is often a sign that they are in a bottoming process and may offer some upside potential. One sector I've been watching for several months that has been in a basing pattern is the homebuilders group.

Recently the National Association of Realtors reported that existing U.S. home sales fell to a 10-year low in the second quarter and the median price for a single-family house dropped 7.5% from a year earlier. Sales of single-family houses and condominiums declined 16% to 4.913 million on a year over year basis.

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