When Junk Leads, Get Defensive

There are signs that 'junk' stocks are leading and good stocks are being sold.
By Fred Meissner ,

NEW YORK (

TheStreet

) -- Here at the

FRED Report

we have been writing about the likelihood of a year-end rally since late October. In fact, December has seen a strong move. We also have been writing about the possibility that the next peak will be a bit more severe than prior corrections; there are now some signs that the peak is getting closer.

Now is

not

the time to throw caution to the wind. We are not "loading up" on the long side, rather we are looking carefully at groups and sectors with the idea of doing some selling and rearranging should we see more deterioration in our indicators. There is a fair amount of resistance here and while this week is options expiration week, and holiday seasonality normally takes the market up, we are starting to be a bit more cautious about the beginning of 2011.

We note that there are some signs of weakness. Here we compare the

iShares Dow Jones US Technology Sector ETF

(IYW) - Get Report

and the

SPDR S&P 500 Trust

(SPY) - Get Report

and note that tech, which has been a leader all year, has suddenly started to lag.

This is a sign the "junk" is leading and good stocks are being sold. The big move up in banks we have seen since the beginning of December is an example of this.

We have also seen strong stocks in strong sectors lag, while weaker stocks in the same sector have slowed.

For example, check

McDonald's

(MCD) - Get Report

and

Home Depot's

(HD) - Get Report

long-term charts. MCD has been stronger all year, but is now lagging vs. HD.

Another sign of this is that our favorite defensive sector, consumer staples, is starting to pick up once again. We show the chart of the

Consumer Staples Select Select SPDR

(XLP) - Get Report

below, and compare it to the

iShares S&P 100 Index

(OEF) - Get Report

daily chart.

OEF has started to trade a bit better than broader indices -- it is the largest cap stocks in the S&P 500 and as such is a bit more defensive.

We wouldn't be shocked if the current strength into the end of the year begins to falter earlier than we anticipated and the weakness that we predicted in the first part of 2011 shows up ahead of schedule.

Fred Meissner is founder and publisher of

The Fred Report

. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report.?A detailed bio is here:

Fred Meissner

.

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