Despite bursts of strength, weakness in stocks tied closely to the economy shows the market's true state.
While sexy technology stocks, such as Amazon (AMZN - News), grab headlines with hot new products, basic resource and industrial stocks continue to struggle. And even though the domestic economy may be less reliant on the latter, their struggles remain a giant drag on the stock market.
In other words, strong performance by a few groups cannot change the message of the majority: This is a bear market.
To be sure, trading over the past few days did not feel like a bear market. In afternoon trading Tuesday, the Dow Jones Industrial Average was within striking distance of a full recovery of last week's steep losses. And the technical breakdown below the August-September trading range seemed to be negated.
But when we dig down beneath the surface and go beyond the fresh eight-week high in such strong tech stocks as International Business Machines (IBM - News), we will see the dark underbelly of the bear.
For example, even after a strong open this week, the Select Sector SPDR-Materials (XLB - News) exchange-traded fund still shows a breakdown from its August-September range (see Chart 1).
Last week, this ETF was led lower by the likes of metals miner Freeport-McMoRan Copper & Gold (FCX - News), chemicals maker (DD - News) and AK Steel Holding (AKS - News). The ETF itself shows a steep, high-volume decline and an unsuccessful recovery on declining volume.
Tuesday, the ETF was able to test, or revisit, its point of breakdown, but it could not hold that level. With Wednesday's decline, the bears have resumed control.
The materials ETF contains a cross-section of companies operating at the base of the economy producing the inputs needed for manufacturing and building. As they say, if the foundation is wobbly, then the house will not be strong.
But the next level of the economic house is also struggling. The Select Sector SPDR-Industrial (XLI - News) ETF broke down hard last week (see Chart 2). Some of its higher profile components, such as machinery maker Caterpillar (CAT - News), industrial conglomerate 3M (MMM - News) and rail stock Norfolk Southern (NSC - News) provide solid evidence for the bearish case.
Moving along the economic continuum, energy stocks also hold breakdowns on the charts. The Select Sector SPDR-Energy (XLE - News) ETF cracked last week on heavy volume (see Chart 3). It, too, rallied back to test its breakdown level but seems to have hit a ceiling. This action cuts across all sectors but is quite clear in refiners such as HollyFrontier (HFC - News) and oil-services stocks such as Schlumberger (SLB - News).
Moreover, financial stocks remain weak. The Select Sector SPDR-Financial (XLF - News) continues to underperform the broad market over any time frame we can choose from one month to one year. And its chart shows a breakdown last week with a rather tepid recovery attempt.
Even in stronger groups, such as technology, there are haves and have nots. Internet and computer-hardware stocks are definitely the leaders this month. But semiconductors and networking stocks are not. Giant chipmaker Intel (INTC - News). Select Sector SPDR-Financial (XLF - News) may have performed very well in September, essentially ignoring last week's decline, but its volume statistics show very little conviction in the rally.
Traditional measures of market breadth, such as the advance-decline line are weak, but do not show any real danger. But the technical breakdown in a large swath of the market suggests that overall the list of good stocks is getting smaller.
All of which adds up to a bear market. Don't be fooled by the occasional shows of strength.
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