The FRED Report (www.thefredreport.com) filters macroeconomic trends through a technical lens. We look for signs that the market is suggesting something different than consensus opinions. There are signs of this now in the performance of two sector exchange traded funds. They suggest the economy is continuing to improve, while the press has been uniformly negative of late. In addition, most market pundits are negative. We feel these two ETFs are telling a different story.

Examination of the SPY chart shows a market that is below the June 21, 2010, high, but challenging that high. The reason suggested for this market action, trading under the June high, is that the economy is slowing and fears of a double-dip recession abound.

Technical analysis suggests a different outcome. We have written about this in our article " Double Dip Recession, Dow Theory says NO!" and have further evidence that this is the case. A look at the New York Composite Index (ticker ^NYA) shows that the June highs have been exceeded. This is important because the NYA contains more than 2,000 common stocks traded on the New York Stock Exchange, including most of the stocks in the S&P 500 (SPY).  The broad market is stronger than the SPY, and that is bullish. An ETF that covers the NYA is NYC, but there are some data issues with the chart of the NYC.

 

Turning to sector analysis, there is more to support our view. Note that the XLB (Materials) and the XLI (Industrials) are stronger than the S&P 500. This suggests that market participants sense the possibility of outperformance by stocks in these sectors in the months ahead. This, in turn, suggests a stronger economy. For these, plus other technical reasons, we expect the market to be stronger into the end of August, and quite possibly into the end of the year, and we expect the economy to continue to slowly improve rather than undergo a double-dip recession.        

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.